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August 13th, 2015
New Equipment Subscription Based Model Takes Hold With Metro New York Restaurant And Food Service Operators
Restaurants and foodservice operations are turning to subscription-based services for everything from linens to ice machines.
Let’s face it. Having your newspaper delivered to your door sure beats having to go out in a blizzard to buy one. Now restaurants and foodservice operations are turning to subscription-based services for everything from linens to ice machines.
“Subscription-based services have been around for quite some time, but it is fair to say they have achieved a higher profile and become more prevalent over the last few years,” says John Mahlmeister, Easy Ice co-founder/chief commercial officer. “The primary market force behind the adoption of subscription services for foodservice is the same as it is for any industry – the complexity of delivering on customer expectations.”
Mahlmeister notes that the precursors to subscription servicers were the aerospace and automotive industries, which pioneered outsourcing on a massive scale in the ‘80’s. Now foodservice is adding on to that.
“In his book ‘Outliers,’ Malcolm Gladwell argues that companies like Microsoft and Sun Microsystems were possible because Bill Gates and Bill Joy had access to time-sharing computers – a perfect example of a subscription service. Salesforce.com has almost single-handedly dismantled the enterprise software business through its Software-as-a-Service model,” he says.
But while the aerospace and software industries differ greatly, there’s a common theme in these examples and it’s the level of complexity and the specialization required to be successful, according to Mahlmeister. “Let’s look at the marketing side of the restaurant business. Twenty years ago - no Internet. Ten years ago, Facebook was just a year old. Groupon, Twitter…all creations of the last decade. Now they are staples of managing a thriving restaurant,” he says.
Behind it all is The Food Network and its elevation of the art and profile of food preparation. “Recipe evolution is happening faster than ever,” points out Mahlmeister. “Ingredient proliferation has exploded. Keeping the pantry stocked is more complex than managing Apollo 13’s return flight!”
Staffing, technology, and regulations have all become more complex, leaving operators faced with myriad choices on a regular basis. “In a 2014 ‘Crain’s’ interview, Danny Meyer is quoted as saying to his staff, ‘I want you to understand what makes each restaurant unique and who brings it to life every day—just absorb it.’” He says that statement is an acknowledgment of how complex the business has become. So, while it’s possible to make a complicated and intricate argument as to why foodservice is ripe for this business model at this time, it’s simple. It’s our turn.
Why did it take so long for the subscription model to reach business-to-business (b2b)? “For one, complex issues such as the way providers of equity (PE firms) evaluate businesses,” Mahlmeister says. “For example, subscriptions negatively affect earnings before interest, taxes and amortization, where capital purchases don’t – and since CEOs like bonuses too, they steer away from subscriptions. Human nature tends to focus on solving immediate problems rather than problem prevention – when was the last time you saw your doctor or dentist? Operators want predictability, but they also want the flexibility to skip a preventive maintenance (PM) this quarter to make up for a shortfall. These are all demand-side issues that affect whether or not businesses really want subscription services.”
On the supply side, it’s difficult, he says. “Subscription models work best when the provider can control 100% of the service delivery chain. On the residential side -- cable, utilities, magazines, trade journals, Netflix, XM Radio, HBO -- control almost every aspect of their service delivery. An individual user isn’t going to damage the Netflix service. One subscriber can’t change the fundamental economics for XM. A difficult HBO customer can be terminated with no incremental cost. This makes the service provider’s costs predictable, which means they can set their prices and be confident of the margin.”
It’s hard for b2b providers, however, to find services where they can control such a high percentage of the variables. “Take ice machines, for example. The quality of the equipment. The quality of the water. The temperature of the room. The air flow around the ice machine. The airborne particles – grease, yeast, etc. All of these items affect the performance of the equipment,” Mahlmeister says. “All must be assessed and mitigated in order for an ice machine subscription service to work. That takes a lot of research, planning, and diligent execution. Right now, it is easier for a service provider to charge time and materials based on the amount of work the equipment needs rather than trying to figure out how to control the amount of work the equipment needs through preventive techniques.”
Why would a business opt for a subscription service over a lease? “The difference is rooted in which party bears the financial penalty for the asset’s failure to produce an outcome,” he explains. “A well-designed subscription focuses on the performance/output of the asset, where a lease – at its core – is focused on the asset itself. At one end of the leasing continuum, a financial lease is a payment plan. At the other end, operational leases include features such as preventive maintenance and warranty maintenance services. While there is no doubt these features are valuable to an operator, the lease is still focused on the asset and specific activities, not the result or the outcome.”
Mahlmeister gives the example of an ice machine, which uses a float switch to sense the water level. “Over time, every float switch will get coated with minerals or sediment from the water, begin sticking, and shut down the machine. There is nothing wrong with the ice machine. The asset is fine. Preventive maintenance was performed as scheduled. It isn’t a warranty problem. That means the lessor will not bear the financial penalty for the asset’s failure – the operator will.”
With a subscription, the provider is responsible for that failure to perform. The provider will make the repair at no additional cost to the operator. The provider will pay for the ice until the machine produces the output that is covered by the subscription agreement, he explains.
Subscriptions can also help avoid a big cash outflow for a piece of equipment that creates zero differentiation, he continues. “Large cash outflows with delayed tax benefits should be considered investments. They should yield a return in the form of higher prices, higher per check revenue, lower cost to service, higher traffic. If your capital spend doesn’t generate any of these benefits, it is a poor investment. Ice machine purchases fall into this category.
“For 99% of restaurants, it does not matter how much time and money you spend on the ice machine. Your customers will not pay more for a drink, order more drinks, or tell their friends to come buy drinks, because you chose to purchase your ice machine. They couldn’t care less. Improving the quality of service, enhancing the menu, redecorating the front of the house – even higher-quality toilet paper – will improve a customer’s perception of your restaurant, delivering a positive return on investment. This is where operators should invest, not in an ice machine.”
Another plus: subscription expenses are predictable. “Purchases are not,” says Mahlmeister. “Repairing an owned ice machine hits your income statement in the month it happens – regardless of the revenue line. That means a $1,000 repair can wipe out two-to-three days of profitability in any particular month. Erratic profitability makes investors and bankers, nervous which means they get sidetracked on the aberrations instead of your business. Subscriptions help you avoid those unpredictable swings and keep everyone focused on the bigger picture.”
In NYC, the company serves customers in every borough. Food Network’s Chopped judges Marcus Samuelsson and Amanda Freitag have chosen Easy Ice subscriptions instead of purchasing ice machines for their NYC restaurants, according to Mahlmeister. “One of Brooklyn’s hottest pizza joints (highly reviewed by Yelpers and restaurant reviewers) Pizza Loves Emily is thrilled with our service,” he says.
Easy Ice’s subscribers in NYC and across the country include multi-unit chains like Buca di Beppo, the new Babbo in Boston (Mario Batali/Joe Bastianich), the new Morimoto restaurant in Miami, and chefs and restaurateurs like Richard Sandoval, Top Chef judge Richard Blaise and Top Chef competitors Nina Compton and Justin Devillier, a two-time James Beard Award nominee.
“By significantly reducing the time, effort, and distractions associated with managing the ice machine, a subscription enables the operator to spend more of its precious time focused on delivering better outcomes and results to its customers,” Mahlmeister says.
Ultimately, the chief commercial officer says, it comes down to a partnership between the operator and service provider. “The key is to structure a business model where both the provider and operator benefit from the same outcome. If providers can figure out a way to do that, the future for b2b subscription services will be very bright.”
Easy Ice offers commercial ice machine subscriptions to restaurants for just dollars a day. Subscriptions include Hoshizaki ice machine, preventive maintenance, sanitation, repairs, water filters and free Breakdown Ice
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