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The Canadian Financial Advisor

Strategy Critique of Gordon Ramsey Holdings (GRH)

Benjamin Felix

The high end restaurant industry is highly cyclical due to its discretionary nature.  In tough economic times the likelihood of consumers choosing to dine at a restaurant decreases dramatically; it is most likely less expensive to forgo the restaurant experience and instead cook at home for a fraction of the cost.  This is even more pronounced when we are looking at high end restaurants.  There are two possible ways that restaurants can increase sales; they can grow through increased same-store sales, or through opening new locations.  The profit margins in this industry are dependent on the restaurant’s ability to source their food at a lower price, and their ability to convince consumers that their product is worth a premium due to preparation and service.

Although the high end restaurant industry is highly discretionary and subject to strongly correlated movement with economic cycles, the environment of a particular location and culture can strongly affect the attractiveness of the industry.  Looking at the high end restaurant industry in London, England using the Porter’s Five Forces model will provide further insight into the industry attractiveness given the time and location being considered.

Supplier Power - Low

The power of suppliers in the industry in general is low due to there being multiple producers of food for restaurants to choose from, but the case is slightly different for high end restaurants; in order to stay competitive in a local area, restaurants need to cater to local tastes and local fare should be sourced as much as possible, subject to quality and logistical considerations (Jones, 2009).  In the case of local producers being able to offer their unique produce or organic meat there is some power with the supplier, but unless a restaurant is specialized in a very rare type of locally produced fare it is almost always possible to source food from elsewhere.  Food is not a unique product, and in London alone there were a minimum of twenty independent organic farms at the time that this case was written (Dunford, 2008).  Considering that food is a commodity, and in this case even specialty local organic food is a commodity, and the cost of switching is also low, the power of suppliers in the high end restaurant industry in London, England was low at the time this case was written.

Buyer Power - High

The buyers in the high end restaurant industry are in a position of power.  It is very easy for a customer to decide that they do not like what is being offered to them; due to the fact that high end customers are expecting an experience that incorporates many tangibles and intangibles delivered with consistency, quality, and creativity (Johnson, Surlemont, & Nicod, 2005) they are especially difficult to please.  If other restaurants are able to offer a comparable experience at a lower price, buyers may choose to eat elsewhere; this is especially true in a down economy that will likely benefit establishments at the middle and lower ends of the market (Jones, 2009).  The costs of switching are of no significance as consumers may choose different restaurants on a weekly basis for no other reason than their curiosity.  All of these factors are furthered by the fact that there are 45 Michelin-starred establishments in London alone.

Competitive Rivalry - High

The competitive landscape for high end restaurants in London is intense.  As previously mentioned, there were 45 Michelin-starred restaurants in the city of London at the time this case was written.  This indicates that there a many competitors offering quality food that is a potential competitive threat.  A decade of economic prosperity in the city had expanded the market (Jones, 2009), but the economic forecasts going forward were not as favorable.  It was expected that household spending would fall in 2008 and 2009 before growing slowly in 2010; contractions in employment were also expected in 2008 and 2009 with stabilization in 2010 (GLA Economics, 2008).  In this economic environment the competition will increase as there are less consumer dollars being spent across the industry.  The large amount of Michelin-starred restaurants and the contracting economy make this industry unattractive.  One important note in this case is that of the 45 restaurants with Michelin stars, only three of them had obtained the three star rating in London (Rogers, 2012), indicating that if obtaining a three star rating was feasible, the competition would decrease significantly, and the industry would become far more attractive.

Threat of Substitution - High

There are massive threats of substitution to the high end restaurant industry.  Rather than choosing to eat at a high end sit-down restaurant, consumers have the options of eating at a mid to low end sit down restaurant, getting fast food, or getting groceries and cooking at home.  At the time that this case was written, it was observed that there had been a rise in the consumption of fast foods as individuals downgraded from more expensive restaurant meals due to the economic downturn (Dominoes Pizza UK, 2008).  In 2009, it was observed that 32% of people were no longer eating out, but were instead opting to buy groceries and cook at home (Allegra Strategies, 2009).  The establishments that were hardest hit by the increase in in-home dining were those charging over £10 per head as consumers sought out greater affordability (Allegra Strategies, 2009).  Consumers are easily able to replace the eating aspect alone, and with the economy struggling consumers are less likely to choose the experience of high end dining for the experience due to the associated price.

Threat of New Entry - Low

For high end restaurants in London, the biggest challenge in entering the market is real estate.  This barrier to entry makes it very difficult for competitors to make their first move.  With an average price of $3,670 per square foot in 2009, London had the second most expensive real estate in the world (Toscano, 2009).  This barrier alone is enough to deter new entrants, but in the case of high end restaurants with Michelin stars, the process of gaining a star could be another barrier.  A Michelin star takes a minimum of six years to achieve.  Restaurants are visited once every eighteen months, and a one star candidate will receive four visits in the process of getting a star (The Independent, 2008).

The nature of the high end restaurant industry at the time of this case makes it a difficult environment for Gordon Ramsey to pursue his aggressive expansion strategy.  With a declining economy that extenuates an already high threat of substitution, and a market that is becoming more aware of the financial and health benefits of cooking at home, the structure of the industry is not conducive to the successful expansion of high end restaurants.  The biggest risk factors faced by Ramsey are the risks of slow economic recovery from the recession and the risk of changing consumer demands; the recession will leave a legacy in which consumers demand better value and an enhanced experience – but they won’t be willing to pay more for it (Allegra Strategies, 2009).

Considering Porter’s value chain and drawing upon the resource based view of the firm, Gordon Ramsay Holdings (GRH)’s core competencies lie in the bundle of valuable tangible and intangible resources consisting of Gordon Ramsay himself, the company’s ability to internally cultivate talent, and the company’s strategic partnership with Blackstone; this combination translates into a competitive advantage that is valuable, rare, in-imitable, and non-substitutable.  Gordon Ramsay’s presence is a primary activity that encompasses operations, marketing and sales, and service.  The company’s ability to cultivate talent is a secondary activity that can be classified as human resource management, and the strategic partnership with Blackstone provides support functions in the way of procurement, and infrastructure. 

Gordon Ramsay developed his name through his own talent and dedication to his trade.  He began his career by taking college classes in hotel management, and due to his evident talent he was given opportunities to train under multiple world renowned chefs (Gordonramsay.com, 2013).  Through continued good fortune Ramsay landed a job as a chef in London where he earned the establishment two Michelin stars; through this success he was able to open up his own restaurant and begin building his brand.  The reason for delving into the chef’s history is to paint a picture of the sweat equity that was required to gain the competitive advantage that his name now holds.  Ramsay’s brand is so widely known across the globe that it will continue to gain attention, but only for a finite period if it is not managed properly.  As with any brand, Ramsay’s activities will dictate whether or not his competitive advantage is sustainable; the competitive advantage that his name carries is due to his reputation for pursuing culinary perfection (Jones, 2009), but allowing GRH to stray from this goal will quickly eliminate any advantage associated with his name.  This capability is highly transferable for international expansion if the integrity of the brand can be maintained, and it is an excellent avenue to promote the other undertakings of GRH such as his cooking school, cookbooks, cookware, and television shows.  Using the brand to promote these things could, however, be a double edged sword.  While promoting these products the brand could stand to be devalued and cause a collapse of the value chain.

Just as the talented Ramsay was given the opportunity to study under famous chefs to propel his name to having desirable association, talent development is a major part of GRH’s competitive advantage.  With Ramsay’s aggressive growth across the globe it is necessary to have experienced staff that can be rotated to manage restaurant openings (Jones, 2009).  This support activity is absolutely necessary for GRH to maintain brand integrity by training chefs and managers that are able to operate at the level of perfection that Ramsay has built his name on; this is especially true as the brand spans the world and Ramsay himself can be directly involved in an increasingly lower percentage of his burgeoning business units.  One promising accolade associated with GRH’s ability to groom talent is that it is separable from Ramsay himself (Jones, 2009), and should therefore be highly transferrable, and in fact highly necessary, to international expansion.  This capability is not transferrable into other undertakings except for the cooking school where it is clearly a huge advantage.

GRH’s relationship with Blackstone cannot be separated from Ramsay’s name due to the fact that his pursuit of culinary perfection has been the key to their relationship.  Any prolonged dip in the quality of GRH establishments would put pressure on Blackstone and open the door for competitors (Jones, 2009).  The relationship with Blackstone is highly conducive to international expansion, but has far less to do with Ramsay’s other undertakings.

Overall, the value chain of GRH is highly transferable to international expansion, but not all of the capabilities are transferable to the other undertakings.  It is very important to understand that making sacrifices to any one of the three capabilities for a short term gain will have a drastic effect on the value chain.  GRH’s value chain is highly dependent on its bundle of resources being able to function together, and if the three of them are not working in unison, the competitive advantage is no longer sustainable.

Ramsay is the face of GRH.  The business is built on nothing more than his fierce desire to achieve culinary perfection; whether this is being done as he cooks food in one of his restaurants, meticulously trains a prodigal new chef, or screams at a contestant on a television show, he is maintaining the integrity of his brand and his name.  If the quality of any one of GRH’s establishments dips below the standard that people expect from Ramsay, the entire brand and Ramsay’s name lose value.  This does not mean that it is not possible for GRH to continue operations without Ramsay being present, but adjustments would need to be made to the company’s operations and a succession plan would need to be implemented. 

A plan for the continuation of GRH with Gordon Ramsay removed from the operation would be heavily reliant on the ability of the establishments to maintain his level of perfection.  Consumers expect to be treated to the Gordon Ramsay experience when they decide to eat at a GRH establishment; they do not necessarily expect to see Gordon Ramsay.  Ideally, due to this fact, GRH should be able to provide the Gordon Ramsay experience without the presence of Ramsay, but this has not been the case.  When Ramsay gave special attention to the opening of a Versailles restaurant, it was noted that the standards at other establishments decreased significantly enough to be noted by consumers (Jones, 2009).  The first consideration in creating a succession plan needs to be institutionalizing functions that could lower uncertainty, improve operational efficiency, and mitigate risk (Jones, 2009).  The construction of teams to carry out specific tasks such as restaurant openings around the world is an important consideration, but it may not be the solution in preparing the business to operate separate from Ramsay; instead of a single center, the company could establish core office hubs around the world in an effort to customize their products and services and unite the business units around a platform of proprietary knowledge and competencies (Prahalad & Bhattacharyya, 2011).  The next consideration in preparing for operations without Ramsay is the idea of a quality control function that is able to maintain Ramsay’s level of perfection throughout all establishments that bear the name.  The optimal way to accomplish this may not be with a strict manual that standardizes the operations across the globe; to take a lesson from McDonald’s globalization strategy, GRH could consider the idea of creating a single uniting platform on which the company could unite (Prahalad & Bhattacharyya, 2011).  Leveraging this platform would allow GRH to eliminate concerns about standardization under Chef Ramsay’s rule, and instead operate with the common goal of providing culinary perfection, an excellent experience, and customized offerings for different cultures while maintaining unity in the three things that have provided a competitive advantage to this point: Ramsay’s reputation for perfection, the internal cultivation of talent, and the strategic partnership with Blackstone.

When looking closer at the talent development portion of the sustainable competitive advantage, one of the major points made in the case is that GRH recognizes that the ultimate dream of any ambitious professional chef is to open an establishment of their own (Jones, 2009).  In an effort to maintain the talent they have helped to cultivate, the company will assist such chefs in opening their own establishments as subsidiaries of GRH.  This approach has both advantages and disadvantages from an RBV perspective of GRH.  The most notable advantage of this approach is that it maintains a key part of the resource bundle by allowing top talent and ambition to be retained within GRH.  If these chefs were driven out of the company due to their feeling suppressed, they would become competitors rather than revenue streams.  In line with this advantage is the fact that even if a chef opens their own branded restaurant as a subsidiary of GRH, they will still be able to contribute to the development of their own successors who can then participate in subsequent restaurant openings (Jones, 2009).  Allowing individuals to open their own restaurants is also advantageous because it fosters creativity and is more likely to incorporate local tastes and cultures due to a high level of involvement from the chef.  Gordon Ramsay is so busy with his multiple ventures that he is unable to personally oversee the opening of every new restaurant and, as previously mentioned, this may be a good thing.  Allowing individual chefs to create their own customized restaurants that meet local standards and cultural needs while remaining united under the ideals of the brand could be extremely effective for both the chef and for GRH.  The most notable disadvantage of this system is that there is the possibility of a subsidiary to damage the brand image by failing to maintain brand integrity.  A review on Yelp from one diner at Cielo, a GRH subsidiary created by Angela Hartnett, states that “Cielo is your typical fancy restaurant with BLAND food that is ridiculously expensive.  Gordon Ramsay needs to school this woman on how to use seasonings” (Yelp, 2010).  Something that ties directly into this, and could be a major problem considering the likely personality type of a chef with the ambition to open their own establishment, is the issue of GRH demanding that they follow their brand guidelines while running their own business.  In 2010 Angela Hartnett distanced herself from Ramsay and bought out his share in her restaurant, and another of Ramsay’s protégés who had been running a subsidiary also separated from GRH and went on to earn accolades that none of the GRH restaurants earned in the same year (Doward, 2010).  This clear evidence of disagreement with chefs of his subsidiaries has negative effects on the GRH brand, and it results in lost talent and burnt bridges.

In August of 2010 Ramsay and his business partner (and estranged father in law) Chris Hutcheson transferred all of their shareholdings into a new company called Kavalake Ltd. which is now the holding company for all of Ramsay’s interests (Doward, 2010).  If Ramsay is seeking investors for Kavalake Ltd. the primary concerns he needs to address are located in the financial statements.  Areas of concern include nearly $10M of liabilities in excess of assets and a quick ratio of just .29, current assets decreasing by 40% between 2010 and 2011, and losses of $4M in 2011 which is a 90% increase from the $450K loss reported in 2010.  Some of these numbers can be attributed to a large amount of capex and debt repayment which combine for $8.5M of negative cashflows.  The financial situation of Kavalake appears to be unstable, and the reported losses are a clear red flag.  Taking into consideration the significant increase in capex and debt repayment, however, it is possible that the posted losses on the income statement are the result of restructuring the financial position of the company.  Separate from the balance sheet, there are major concerns with the negative publicity that has surrounded Ramsay regarding both his personal and business activities.  In 2010 Ramsay had been criticized for unpaid suppliers, there were complaints from diners that Ramsay was too involved in TV, and American employees filed lawsuits for unpaid overtime work; all of this was occurring while interest payments for Kavalake had reached $557M.  With the interest payment reduced by more than half in 2011 the prospects of investing in Kavalake were improving, but the risk increased when the Claridge’s in London failed to renew the chef’s ten year lease when it expired that same year (Ryan, 2013).  Two years later, the Claridge’s contract was lost entirely by Ramsay; this occurrence was a hit to the high end Ramsay brand, but it is not majorly detrimental to the overarching strategy of culinary perfection that has brought success to Ramsay.  The cyclical nature of the dining industry inevitably results in changes and developments in the market; the opportunity that Ramsay had at Claridge’s propelled his career.  It is the end of an era and an indication of a slight shift in strategy toward serving culinary perfection to the middle market rather than pursuing high end dining.  Ramsay has guided Kavalake through a transformation, realizing that companies that seek leadership positions in their industries may have little choice but to pursue the global middle market (Tse, Russo, & Haddock, 2011).  Ramsay has indicated that ‘we took away the blasé-ness with ridiculous, overpriced ingredients [such as] Aberdeen Angus, how do you make a shin of beef just as tasty? How do you use an amazing, sustainable pollock or replace tuna with swordfish?'  This restructuring and shift in the way that Kavalake brings culinary perfection to consumers is an intelligent shift in strategy that will allow the company to maintain their sustainable competitive advantage while staying relevant in a changing market.  David Beckham recently made an investment in a restaurant with Ramsay; the Union Street Cafe will serve reasonably priced food in London (Burn-Callander, 2013).  Evidence of the successful restructuring and shift in strategy is clear in the £2M profit that Kavalake recently posted for the year to August 2012.