Insurance and Business Acumen

Insurance and Business Acumen

Insurance is all about risk management, unanticipated events and oversights due to negligence.  Even though insurance does not protect against every single poor business judgement and money losing decision, for “extra milers” like Rick Callaway’s Team under Pacific Diversified Insurance, we go out of our way to advice our commercial clients in restaurant business about using business acumen to stay profitable. Today we’d like to address the issue of offering too generous promotional deals that will bite.

For example, seafood chain Red Lobster’s offered an all-you-can-eat summer crab leg special in 2003. Parent company Darden’s then Chief Executive Joe Lee was quoted as saying, “It wasn’t the second helping, it was the third that hurt.” “And the fourth,” then Red Lobster President Dick Rivera added on a conference call to investors. The deal lasted a bit too long and was linked to the wipeout of $405.9 million in stock value in a single session, with stock prices dropping 12%.

Carefully crafted promotional offers can increase traffic, return customers and add-on purchases, depending on other factors such as volume of sales and the varieties of products offered to its consumers. Costco offers whole-sale priced gasoline at its own gas stations and $4.99 rotisserie chicken and $1.50 hotdogs, which bring people into their warehouses. And on their way to pick up the rotisserie chicken, they will also, hopefully, grab new patio furniture, a 64 oz. jar of mayonnaise and a five pound bag of cashews. Consumers spend on average $136 each time they enter the warehouse.

However, what works for a giant like Costco may not work for mama-papa restaurants, or even chain restaurants.  Before rolling out a fantastic promotion that may be just too good to be true for both the consumers and for a restaurant’s bottom line, management must do some serious analytical work on risk tolerance, to prevent financial losses.  Management needs to crunch numbers with its chief financial officer, accountant, and talk to other different groups within the organization, to evaluate the pros and cons, costs and benefits associated with a promotional deal.
Consistency in food’s quality and service maybe more reliable for a restaurant’s bottom line, than getting customers into the door with expectations of a great discount or promotional deals. Discounts and deals can “spoil” customers: When the deals are gone, so are the customers.

(Statistics quoted from “The Risk of Being Too Delicious” http://www.riskmanagementmonitor.com/the-risk-of-being-too-delicious/)