“More Money than Sense”

As this is the first blog entry on this site in 2016, may I wish everyone reading a happy new year and hope that you had a good festive period.

This blog is a commentary on a programme broadcast by Channel 4 over Christmas called The World’s Most Expensive Food.

The programme focused on two businesses selling luxury foods and catering services.  One was a small American business trying to sell a 50 gram chocolate bar to London luxury foods retailers.  The chocolate retailed at £160 per bar and the annual production run was 300.

The second business was a catering firm supplying food to the private jets of the rich and famous.  This business operated in London and aimed to supply Michelin guide quality food to its clients.

Both businesses caused my father to exclaim that some people had “more money than sense”, particularly one client who paid upwards of £200 a trip to have a proprietary brand of soft cheese and crackers on his personal plane.

Leaving aside the morality of the issue and accepting that the super rich are a market niche, it is worth examining the issues affecting the airline food business.

The business had been operating for a couple of years and serviced private jets at London Airports.  It employed a number of chefs as well as staff who took orders; collected food from London restaurants/retailers; and travelled the world to source ingredients.  The business was not profitable.

In an attempt to turn the business around, its proprietor had decided to enter the home dining market providing catering for dinner parties.  This decision was not deeply examined by the programme but it set my marketing brain tingling.

It was clear that the business had been set up to address a particular gap in the market, the supply of high quality food to the air transport industry.  Now the business was abandoning that niche to compete against a number of personal chefs, event caterers and high-end restaurants.

One wonders what marketing planning or marketing research had taken place as part of this change of strategy?

It seemed that the business was not taking account of the guidance provided by the Ansoff Matrix on growing a business.  As discussed in previous blog entries, the Ansoff Matrix provides four strategic routes for business growth.  The easiest of these routes is market penetration, or selling more of your product to you existing customer base.  The hardest strategy is that of diversification i.e. selling new products to a new customer base.

The two other strategies are market expansion; selling existing products to a new customer base; or by developing new products for your existing customer base.

The catering firm in the documentary appeared to jump straight to a diversification strategy without examining the potential for growth using the other three strategies. This directly went against the advice of Ansoff which stated strategy should only change when the existing strategy had been exhausted.

This business was dealing with the most price inelastic customer base.  For the client base of the firm, money was no object.  In such circumstances, where a business can effectively name its price, no firm should be loss-making.  Or is it the case that significant investment had been made to service a niche which is either too small to generate regular business or which doesn’t really exist?

Personally, I believe that, rather than entering the home catering market, the catering firm may be better placed looking at an expansion to another suitable base.  The business serviced London but its clients were travelling to and from other locations.  Rather than entering the home catering market, the business might have been better served by setting up a second operation in say, New York.  Its current customer base its as likely to fly to New York as it is to fly to London.

Such an expansion is a clear example of market penetration not diversification.

Starbucks is an example where expansion in this manner was a route to success.  When the first Starbucks opened, it was unprofitable and struggling.  Rather than changing the business or giving up the ghost, its proprietor took a risk and opened up two more coffee shops in Seattle.  Only then did the business have enough scale to become profitable.

I have no idea whether the expansion into home catering will be successful but I guarantee that if the firm’s proprietor had applied some well recognised marketing theory to his decision making, he would at least be properly informed of the risks associated with his strategic decisions.

Philmus Consulting Ltd can help your firm apply recognised marketing strategies that inform you of risks and to help develop marketing plans which fit your customer base.