The recent demise of Ed’s Easy Diner is a reminder that industries are not created equal. Some have inbuilt structural disadvantages that make them a more precarious vessel for investor capital.
The casual-dining industry may have many good things going for it – steady growth in disposable incomes and the rise of generations who can’t boil an egg – but it has more than its fair share of headwinds too. Barriers to entry aren’t high, which means others can incubate and launch more fashionable formats. It’s a nightmare to recruit and keep good staff, thanks to the long, unsocial hours. Customers, meanwhile, are both promiscuous and value-conscious – an unhealthy combination that sees a high proportion of spend linked to money-off vouchers.
Even the relatively successful Restaurant Group must have wished it traded in more benign waters when its attempt to improve margins led to wholesale customer defection. With its share price down 40% on the year, the owner of Chiquito and Frankie & Benny’s announced in August that falling sales would result in the closure of 33 of its 500 outlets.
The idea that structural influences make for an unlevel commercial playing field across different industries was first advanced in 1979 by US academic Michael Porter. His eponymous framework identified the "five forces" that govern profit potential: existing rivalry between companies within the industry; the threat of new entrants; the threat of substitution; the bargaining power of suppliers; and the bargaining power of buyers. The higher each one is, the less promising that industry’s financial prospects.
The framework might have predicted that casual dining – with its unfair share of rivalry, threats and consumer bargaining power – would be a bumpy ride. Porter identified airlines as a sector that traditionally struggled to repay the cost of capital – and the on/off bankruptcy of UK low-cost carrier Monarch this month suggests little has changed.
Although the framework was devised long before the digital revolution, it is still only too applicable, with one of those forces – "the threat of substitution" – the driver of the accelerating crises in a host of hitherto sturdy industries. "Disruption" wasn’t such a fashionable word in those days, but that’s what it amounts to.
Which industries wouldn’t you rush to be in today, with that particular force in your face?
Hotels: bogged down by high sunk costs and hamstrung by regulatory demands that, unfairly, do not apply to its disruptor, Airbnb.
Newspapers: an endless quest to persuade people to pay for high-quality journalism rather than expect it for free just because it shares a delivery channel with the mindless, grammarless, unedited and uncorroborated rants spewed out by 99.9% of the world’s 170 million bloggers.
Retail banks: swimming in a torpid regulatory environment, weighed down by mismatched legacy IT systems that came along with their various mergers and now finding themselves nibbled at by tech-savvy "layer-players" that can focus on doing one thing well.
And restaurants such as Ed’s Easy Diner (now rescued by Giraffe, by the way): as if they didn’t have enough issues to wrestle with, along comes Deliveroo to make it easier for everyone to stay at home and not pay all that mark-up on drinks.
For marketers caught up in disrupted industries, it’s a bittersweet experience. On the upside, there’s the kudos of living through something unusually challenging and coming out intact the other end; a bit like being able to tell someone who spent their holiday in a Sardinian spa that you did a week’s white-water rafting in Nicaragua. On the downside, it is actually like white-water rafting.
Certainly, resourcefulness will be required of any marketer who finds himself or herself on the wrong end of all five of Porter’s forces. Communications can’t save you now – always assuming there’s a budget for it. This is where marketers need to reach with all their intelligence and imagination for the levers of pricing, channel strategy and, especially, innovation.
We all used to worry about competitors eating our lunch. These days, there are predators out there that can devour entire industries as amuse-bouches. Marketers can feel pretty insignificant in that whirlwind of change. But on our day, and at our best, we can still exert a force.
Professor Michael Porter
Porter, 69, is the Bishop William Lawrence university professor at Harvard Business School. A lifetime of prodigious academic output, which includes 18 books and numerous articles, has earned him the distinction of being the most cited author in business and economics.
Already a rising star when his "five forces" framework was published as part of an article in Harvard Business Review in 1979, he went on to become a six-time winner of the McKinsey Award for the best HBR article of the year.
In recent years, Porter has devoted his energies to addressing the problems in healthcare provision in both advanced and developing nations.
Helen Edwards is the former PPA business columnist of the year. She has a PhD in marketing, an MBA from London Business School and is a partner at Passionbrand.