Zoe’s Kitchen – Case Analysis Essay
Zoe’s Kitchen – Case Analysis
Zoës Kitchen began in 1995 as a family-run restaurant in Homewood, Alabama. The company’s owner, president & CEO, John Cassismus had turned his attention from his own business ventures to the family business, with desires to build a world-class company. Mostly frequented by mothers with small children and white-collar employees in the area, the restaurant catered to those consumers with a desire for healthy foods at comparatively lower prices. As of December 2005 there were 16 locations in five different states. The brand was strong and synonymous with freshness, home-style goodness and family recipes. The menu boasted healthy selections, mostly with a Greek influence, (i.e. chicken pitas & roll-ups, salads & dinner plates) which consumers could also purchase in larger quantities for take-home consumption.
The industry outlook was good for Zoës Kitchen. The only expected growth in the now mature restaurant industry was expected to come from the fast-casual segment, and as a ‘member’ of this segment, Zoës Kitchen was positioned well for growth opportunity. However, it also faced the inherent threat of fierce industry competition. The threat came from many directions; new players entering directly into the fast-casual market, as well as other large players already in the restaurant business looking to grab market share (i.e. fast-food restaurants offering healthier & fresher choices).
In December 2005, Zoës Kitchen looked forward hoping for continued growth in the upcoming 2006 year. It had 3 scheduled openings for 2006, and the company was seeking ways to position itself to exploit market opportunities that became available. While everything to date had been positive, John Cassismus was now faced with the ultimate question: “What next for Zoës Kitchen?” With John Cassismus putting his main focus on strategic growth, his next logical step would be to determine how to accomplish that goal (Thompson et. al., C-191). Growth in the industry meant increasing the number of locations or units.
For Zoës Kitchen, the only means of achieving rapid location expansion would be large cash investments, without excessive debt. Unfortunately, excessive debt in the restaurant industry can be detrimental to profitability and ultimately success (Zheng, 135). Thus, this analysis will explain that there are two viable options for John Cassismus & Zoës Kitchen in order to achieve continue strategic growth; 1. Sell the company/allow for an acquisition, or 2. Franchise the company nationally and/or internationally. Additionally, Zoës Kitchen will need to increase market segment share. This will be most advantageously achieved by increasing dinner-time sales.
Zoës Kitchen’s StrategyAccording to the text, there are five generic competitive strategies; overall low-cost provider (i.e. Wal-Mart), broad differentiation (i.e. Charles Schwab), focused low-cost (i.e. Travelodge), focused differentiation (i.e. Gucci) and best-cost provider (i.e. Toyota for Lexus line) (Thompson et al, 134). Superficially, it appears that an organization may at any time employ a variety of these strategies, however “each involves distinctively different approaches to competing and operating the business” (Thompson et. al, 135). Zoës Kitchen was operating on a focused differentiation strategy; aiming at securing competitive advantage by appealing to the specific needs and desires of a well-defined market of consumers. A marketing survey completed for Zoës Kitchen showed that their loyal customer base placed the highest value on quality and service, not on price (Thompson et al., C-184).
This survey confirmed that a ‘low-cost’ strategy was not necessarily a good choice for the company. The broad differentiation strategy would not allow the time or attention on such a well-defined niche that John Cassismus would have desired. The company is striving to capitalize on a very specific niche; time-starved, health conscious, affluent individuals. As such, it was clear that John Cassismus has built Zoës Kitchen into a well-positioned company, with an effective strategy well-matched to its market segment of the industry. The focused differentiation strategy largely depends on a buyer segment that seeks special product attributes (i.e. healthier food, lower comparative cost, quick service) and on the company’s ability to stand apart from its rivals (Thompson et. al, 153). In its uniqueness, Zoës Kitchen has the ability to be different and had no national rivals emulating its format or menu.
SWOT AnalysisStrengthsIt is clear that the major strength for Zoës Kitchen is its people. First, John Cassismus himself is an asset worth discussing. John built the company from a single, family run restaurant into the existing 16 location operation. Dear to his heart, John fostered the business which was inspired from the kitchen of his very own mother, Zoë. He was described as being optimistic, sales oriented, an entrepreneur, a visionary and hard-working. Two previous successful ventures gave John the knowledge and experience he would require. Zoës Kitchen’s growth may even be linked to the effect of a learning/experience curve (Thompson et. al, 53).
While John’s experiences didn’t necessarily provide large economies of scale (for cost cutting purposes), his knowledge did allow him to recognize the importance of excellent human resource management, a clearly defined strategy, building brand loyalty and strong business systems. Second, John built a healthy workforce with well-trained employees. Stores had very little turnover; many of the employees had been with Zoës Kitchen since the company started. Morale was high, and John rewarded employees with the above market average compensation and bonuses which were tied to performance.
Another critical strength for Zoës Kitchen is the customer loyalty which had been carefully cultivated and expanded. A marketing survey conducted by the University of Alabama revealed that customer loyalty was strong. With happy and satisfied customers, Zoës Kitchen possessed the ability to rely heavily on ‘word-of-mouth’- advertising, as over 50 percent of survey respondents had discovered the store through family and friends.
Finally, Zoës Kitchen has good internal systems which allow for risk mitigation. John had ensured that strong systems were in place to manage food costs, inventory and labor (Thompson et. al, C-184). Managers had a point-of-sale type system for sales, equipped with a ‘dashboard’ that allowed for easy monitoring of daily sales & costs. This is extremely important strength to note. It has been stated that weak systems can put a restaurant ‘behind the eight-ball’ even before the company can begin to build business (Layman, Internet Web Page).
WeaknessesOne of the major weaknesses that Zoës Kitchen is faced with is the lack of sales during over dinner time. The loss of dinner-time patrons represents a large portion of potential sales. According to the text, the largest percentage of meals consumed outside of the home was for the dinner-time meal. In 2005, approximately 51% of all meals consumed outside the home were during dinner-time (Thompson et. al, C-187). Unfortunately for Zoës Kitchen, most of its sales occurred primarily during lunch-time; approximately 70%! Although the primarily lunch time clientele mirrors what Zoë Cassismus had originally pictured for her small family restaurant, the industry was changing.
Zoës Kitchen also has to contend with the verity that the industry-segment (fast-casual) does not offer the lucrative profits that the fast-food segment can. The fact of the matter is, ‘offering fresh food instead of frozen, hiring talented employees and constructing restaurants with character’ has proven to be expensive (Thompson et. al, C-187). The fast-casual segment is offering customers high-quality products at considerably lower costs than casual or other ‘sit-down’ type restaurants and expenses could quickly eat into one’s profits.
Due to the limited number of physical locations (units), Zoës Kitchen is not yet able to capitalize on the economies of scale, as many of its competitors can. In December 2005, there were only 16 Zoës Kitchen locations. In comparison; Panera Bread had 741 locations with another 155 projected openings in 2005, Qdoba Mexican Grill had over 100 locations in 2003, Moe’s Southwestern Grill had over 800 franchise deals and another 150 scheduled to open, and Baja Fresh had over 288 locations. The negative difference in buying power would impact Zoës Kitchen dramatically and be considered a great weakness for them.
OpportunitiesThe restaurant industry had grown from 1970 to 2005, and now was considered to be mature with a rather bleak outlook for overall growth. In mature industries, an attractive new market opportunity only emerges sporadically at best (Thompson, 106). In this particular case, the fast-casual market segment happens to be a part of this ‘new market opportunity’, and Zoës Kitchen is ‘in’ this new market. The fast-casual segment emerged in the 1990’s and has seen enormous growth in comparison to other segments in the overall restaurant industry. For example, in 2002, New York Times columnist Julie Dunn stated that the fast-casual segment was experience annual growth of 25%, compared to only 2-3% growth in the fast-food industry (Dunn, New York Times). Thus, this industry provided Zoës Kitchen with an opportunity for growth and success.
To further explore this opportunity means also exploring the reason that the industry segment is doing so well. The macro environment for this industry had positive forces impacting Zoës Kitchen. Society’s values and lifestyles reflect a desire to be more educated about health and global cuisine (Thompson et. al, C-187). Zoës Kitchen is well positioned because of a shift in society’s thoughts, behaviors & desires.
People have come to expect quick, nutritious and quality-rich solutions for meals, with smaller dents in their pocketbooks (Axelson, Internet Web Page). Fast food is losing its appeal because of the non-nutritious connotation that is associated with these establishments, and our time-starved lifestyles are not accommodating to the casual sit-down restaurant, much less the white-tablecloth service. As such, the opportunity exists for the fast-casual industry (including Zoës Kitchen) to grab the annual ‘dine-out’ budget of those people who will still dine-out, and yet are being more time & health conscious.
Another attractive opportunity is franchising Zoës Kitchen. In the restaurant industry, sales are often measured in average unit (location) volumes (AUV), with company value based on a multiple of its AUV (Thompson et al, C-192). As such, offering franchise opportunities for potential business investors would allow Zoës Kitchen to expand the number of business units, in turn increasing prospective for growth. Zoës Kitchen already has the strong internal systems in place to make this a successful and lucrative opportunity.
Hand-in-hand with the idea of franchising is the design of moving the company into both national and international markets. The company has strong brand recognition with a loyal customer base, yet to date has locations only in five states. Zoës Kitchen has the ability to be among the pioneers of nationally and/or internationally known fast-casual chains. And, as the marketing industry knows, the easiest way to get into consumer’s minds is to be ‘first’ (Ries, Al, 19). While there are direct competitors in the market, most tend to have a regional appeal. With the use of the company’s airplane, Zoës Kitchen has a real opportunity to expand across the U.S., Canada & Mexico, while still allowing the management team (namely John Cassismus) to visit stores in disparate locations quickly.
ThreatsFor Zoës Kitchen the single most critical threat is that of overall competition in the industry. In 2005, the mature restaurant industry included more than 870,000 restaurants which meant enormous competition for Zoës Kitchen (Thompson et. al, C-184). The rivalry among industry participants is quite strong as each player (in various segments) fight for market share. Each fast-casual provider thus far has tried to differentiate themselves in order to be more appeasing to consumers. A further review of the some of the particular forces of competition is necessary to fully understand how ‘competition’ in the industry is truly affecting Zoës Kitchen.
Firms in Other Industries Offering Substitute ProductsThe restaurant industry may be experiencing a moderate pressure from other food-related industries such as the frozen entrée producers. For example, Kraft decided to market its Digiorno Pizza’s with the catchy headline, “It’s not delivery, it’s Digiorno”. Kraft recognized that the majority of consumer’s automatically associate pizza with the ‘pizzeria’ dine-out/take-out variety, thus the food conglomerate is trying to change consumers thinking by heavily marketing their frozen alternative. In the same way, Zoës Kitchen may be experiencing competition from companies offering healthy alternatives to ‘dining-out’, with low-cost, low-fuss grocery store bought meals.
Buyers and SuppliersBoth of these forces in the industry have a moderately strong competitive impact. The fast-casual segment was hard to define, typically because each chain was so distinctive, however there were some characteristics which were typical of the segment: high quality, fresh food, with a wide variety. These characteristics meant that businesses such as Zoës Kitchen needed scale and operational efficiency, along with excellent suppliers in order to obtain the required fresh inventory. In addition, this threat could prove to have very significant impacts because of some ‘unpredictable’ events.
For example, in periods when fresh produce was adversely affected by weather, suppliers would likely only supply the limited amount of goods available to those buyers with whom they had built stronger relationships, or those who could afford to pay premium prices. Similarly, the larger buyers in the industry have an advantage over the smaller ones mostly because of the economies of scale which can be achieved. For example, Panera Bread has over 478 locations in over 30 states. This particular chain would have more ‘purchasing’ clout and is likely benefiting from economies of scale on a much larger scale than Zoës Kitchen. These threats are quite strong, with the potential to be extremely significant.
Potential New EntrantsThe pressures associated with the entry threat of new rivals are fairly strong for this industry. Particularly stemming from the fast-food companies, the threat of ‘new rivalry’ exists in two forms. First, fast-food providers as they currently exist were offering healthier menu items while still maintaining quick service and low cost. Second, the larger quick service providers were threatening to ‘take-over’ the fast-casual segment by acquisitions and mergers with smaller ‘fast-casual’ competitors. Zoës Kitchen would be threatened by these actions because the other competitors would then have all the resources from the parent company, along with its economies of scale, operations, etc.
RecommendationsAs one can see, the various industry threats for Zoës Kitchen comes hand-in-hand with great prospects. Unfortunately, the fierce competition could very well extinguish any hopes of continued success for Zoës Kitchen in absence of quick business growth. Thus, Zoës Kitchen should move strategically to expand the number of units AND increase market segment share. Zoës Kitchen has reached the point in the business ‘life cycle’ where quick growth is necessary in order to achieve the goals that John has for the company. The options presented are the most feasible ones for Zoës Kitchen at this time. Implementation should be immediate and John Cassismus ought to feel confident in Zoës Kitchen’s future prospects.
Increased Market ShareFirst, independent of expanding the business by number of locations, Zoës Kitchen has the opportunity to increase their share of the ‘dine-out’ consumer dollar by increasing dinner-time sales. Zoës Kitchen is losing out on the dinner-time consumer, and as stated earlier, dinner-time meals account for over 50% of all meals consumed outside the home. Zoës can increase their sales immediately by targeting dinner-time patrons. For consideration: developing new menu items specifically designed for dinner, offering special promotions during dinner-time and targeting different consumers (i.e. families with children).
The lunch time consumer will be most likely be much different from the dinner-time consumer. For example, Zoës Kitchen’s typical consumers are white-collar employees and women with small children, and most sales are during lunch. However, John has to consider that during dinner-time, the ‘typical’ consumer may be different because those white-collar employees are meeting up with their families after work, as are those women with children. The typical dinner time consumer will more likely be families. As such, menu choices, restaurant lay-outs, and location feasibility should be geared toward these consumers.
In conjunction with consider the ‘typical’ consumer; Zoes Kitchen must also reconsider exactly where they choose to open new sites. To date, John Cassismus has only opened stores with very specific criteria which most notably included downtown commercial locations. While these locations are drawing their intended lunch time patrons, to consider the dinner-time patron means to reconsider the practice to only choose these locations. Research shows that only 22% of patrons are coming from work when they visit restaurants, while over 36% are coming from home (Thompson et. al, C-186). With this knowledge, John can still scrutinize average household incomes, parking availability, store frontage and co-tendency, but be less picky on having premium ‘down-town’ spaces. Considering areas closer to residential sub-divisions may prove very successful in reaching those dinner-time consumers who will need to travel shorter distances with their families to enjoy Zoës Kitchen’s fast-casual dinner meals.
Unit ExpansionTo date, Zoës Kitchen has prospered under John Cassismus’s direction and guidance. He utilized his business smarts to build a strong company, based on an effective strategy, with proactive thinking and actions. From the company’s conception, John operated like a ‘world-class’ business with systems, brand image and people developed for steady predictable cash flow. In this sense, John had perfectly readied Zoës Kitchen to be sold, and thus either of the ‘next-steps’ for location expansion is feasible.
Sell the company/Seek a larger quick service company to acquire Zoës KitchenThe successes being seen in the fast-casual market segment were under close scrutiny by the larger quick-service providers (i.e. the fast-food giants such as McDonalds, Wendy’s, and Jack-in-the-Box), and they wanted a share of the market. Most of these companies however could not break into the market with their existing operations. Thus, they sought acquisitions and it proved profitable for both the acquiring and merging companies.
For example, Wendy’s had acquired Baja Fresh (a Mexican fast-casual restaurant mostly in the East United States) in 2002 and kept it operating as a wholly owned subsidiary. This allowed Baja Fresh to remain loyal to its fresh Mexican food standard, but gave them the resources for quick expansion and growth opportunities. Zoës Kitchen can attain the resources needed for quick national and international growth by merging with a quick service provider. In particular, Zoës Kitchen requires financial resources in order to expand its current business (company-owned stores) into other states and possibly countries.
Franchise the companyThe majority of direct fast-casual competitors were large companies with more than quadruple the number of locations than Zoës Kitchen. Many had taken advantage of franchising to rapidly expand the number of locations, while Zoës Kitchen had not yet dabbled into franchising. In an industry where the number of locations matter exceedingly, Zoës Kitchen could quickly expand by franchising the business, with relatively low risk for both company and franchisee.
A franchisee could reduce investment risk by associating with an established company, and only 2 % of franchises discontinued operations within 3 years of opening! (Thompson et al, C-191) The company could require franchises to relinquish significant control over operations, and also require continuous payments from that store. In this way, Zoës Kitchen could still maintain the high-quality business it had pain-stakingly built.
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