A Dozen Business Lessons from Waffle House

I enjoy being challenged to write a post on a topic like Waffle House since it is an opportunity to show that you can learn from anyone or anything. That is why I have written blog posts about people like Rza, Biggie Smalls and Louis CK. In some cases what you learn is what not to do, which can be a very valuable thing.

Waffle House co-founder Joe Rogers got his start in the restaurant business after his service in the military ended after World War II. He joined the Memphis-based chain Toddle House, starting in a restaurant kitchen in New Haven, Connecticut. He learned to be a grill cook by day and at night learned the accounting side of the business from the restaurant manager and his wife. He eventually was transferred to Georgia by Toddle House. A former Manhattan Project security officer and real estate broker named Thomas Forkner convinced Rogers that they should open what would become the first Waffle House location in 1955 in Avondale Estates Georgia. The Waffle House restaurant’s menu listed only 16 items and was open 24 hours a day.

Andrew Knowlton wrote in a Bon Appétit article in 2015:

Because of round-the-clock service, crazy stuff famously goes down at the Waffle House. There’s the time Kid Rock got in a fistfight in suburban Atlanta. Another incident in which a drunk Georgia couple got horizontal in the parking lot, and when the cop told them to get dressed, the woman tried to slip a cheeseburger onto her foot, thinking it was her sandal. There are robberies, cars crashed into facades, and, more commonly, obnoxious boozed-up customers simply behaving badly late, late at night. (Let’s be honest: If the French Laundry were open 24 hours a day, sketchy things would happen there too.)

Waffle House has become a cultural icon. This creates an opportunity for a comedian like Jim Gaffigan:

I love Waffle House. And not just because watching someone fry an egg while smoking reminds me of my dad. I’ve seen a gun five times in my life, three of those were in Waffle Houses. There’s definitely a dangerous feel to them. Even the sign looks like a ransom note. There’s always a letter out, occasionally it’s the ‘W’, so it reads ‘AFFLE HOUSE.” Eh it’s 2 am, let’s go to the Affle House. Their slogan should be: ‘It’s 2 AM; Still Time to Make One More Bad Decision.’ You go in there and everyone’s drunk. You know everyone’s drunk in Waffle House because they have pictures of the food on the menu. How drunk do you have to be to not remember what a waffle looks like? ‘Oh yeah, it’s like a plaid pancake.'”

“If Toddle House had offered ownership to the management team, there never would have been a Waffle House.” Joe Rogers, Jr.

Joe Rogers maintained his job at Toddle House even after starting the Waffle House restaurant. At one point he even moved to Memphis when he was promoted by Toddle House to vice president. But in 1961 he returned to Atlanta since he was frustrated that Toddle House would not allow employees to acquire an ownership stake. After moving back to Atlanta he quit his job at Toddle House and worked full time for Waffle House. Because of his experience at Toddle House, Waffle House has a policy of allowing the employees to have an ownership stake in the business, even though it is privately held.

Waffle House borrowed concepts that it liked from Toddle House but changed other things. As examples of what it did not emulate, Toddle House had no cash register and instead had a steel box called the “Auto Cashier” in which customers dropped money as they left to pay their bill. Toddle House also did not allow tipping. But Waffle House did adopt the policy of 24-hour service and sells many of the same menu items like waffles and hamburgers.

toddle

“I thought everyone went to bed at night, but I was wrong.” Tom Forkner, Sr. “The night business determines whether we have sales enough to be profitable.” Joe Rogers, Sr. “One supreme test of whether it’s a good location—take a real rainy, blistery Tuesday or Wednesday night at two o’clock in the morning, park your automobile there and see how many cars pass. If you don’t have many cars, you don’t have a good spot.” Tom Forkner, Jr.

These three quotations are an opportunity to talk about the rule that every innovative business must break a rule of some kind. There are many best practices and rules in business. At least one of these best practices or rules is broken by an innovative business. If a business does exactly the same things as its competitors, it is not going to be financially successful. It is that difference which can create a moat for a business. Harvard Business School Professor Michael Porter writes: “If there are no barriers to entry, you won’t be very profitable.” In other words, if there is no impediment to new supply of what a business sells, competition among suppliers will cause price to drop to a point where there is no long term industry profit greater than the cost of capital.

Waffle House does some things differently than its competitors, one of which is never closing. The myths that have been created about this “open 24 hours” policy include stories about Waffle House restaurants having no locks on doors or that the keys to each restaurant are buried in cement outside the building. Offering food service all night has proven to be a profitable source of differentiation for the Waffle House. One of the co-founders once quipped that a great attraction for Waffle House for customers is that if you ever see one, it is open. No one ever asks: “I wonder if the Waffle House is still open?”

“We’re just a shoebox. These people who’ve come in the past few years and built these Taj Mahals and stuff—they’re not around anymore. If you could line up the restaurants we’ve seen come and go, that’s a long list.” “We serve the basic foods, and the basic foods never change.” Joe Rogers Sr. “Good food that is fast and affordable.” Tom Forkner.

Business school professor Michael Porter believes: “[Differentiation and lower cost] combined with the scope of activities for which a firm seeks to achieve them lead to three generic strategies for achieving above average performance in an industry: cost leadership, differentiation and focus. The focus strategy has two variants, cost focus and differentiation focus.” When represented graphically it looks like this:

stuck

(Image from Wikipedia)

Waffle House from the beginning adopted a cost leadership strategy. Most Waffle House tickets are only $7-8 according to industry analysts. As a result the business keeps a particularly tight watch on costs. Waffle House avoids the need to amortize an expensive facility. There are no R&D expenses for items on the menu. Food waste is low since there are no left over ingredients like halibut or endive to throw out. When a business like Waffle House buys 2% of all eggs sold in the United States, it gets great prices. A plasticized menu lasts a long time. “Poor Old Cash Customer Who Made It All Possible” reads a sign at the Waffle House HQ. The business finally started accepting credit cards only in 2006, so it is capable of change.

Does Waffle House also have a focus strategy? I think so. They do not try to appeal to everyone. Someone admitted on my Twitter feed that they went to a SEC school and have never visited a Waffle House, which I believe is a crime in some states.

Is Waffle House in a situation that Professor Porter calls “stuck in the middle”? Porter believes: “The firm stuck in the middle is almost guaranteed low profitability. It either loses the high-volume customers who demand low prices or must bid away its profits to get this business away from low-cost firms. Yet it also loses high-margin businesses — the cream — to the firms who are focused on high-margin targets or have achieved differentiation overall. The firm stuck in the middle also probably suffers from a blurred corporate culture and a conflicting set of organizational arrangements and motivation system.” Sears is arguably stuck in the middle. Sprint is stuck in the middle in wireless markets in the US. I’m not sure Porter’s “stuck in the middle” idea is applicable or important in every industry. International House of Pancakes might be stuck in the middle, but they do have that international element going for them, which as Carl Spackler famously said in Caddyshack “they have that goin’ for them, which is nice.”

“It was the highest profit item you could do, so I said, ‘Call it Waffle House and encourage people to eat waffles.”’ [The name also made it clear the restaurant was different from carryout stands.] “You can’t carry out waffles. They get pretty flimsy. So we thought, ‘Waffle House will work.”’ Joe Rogers, Sr.

Life for a business is just better if a it has high gross margins (or at least higher gross margins than its competitors). I’m not saying the margins on a $3.05 waffle are huge, but instead that those margins are probably better than margins on other menu items like a $11.000 for a 10 oz T-Bone steak. Restaurants are well known for adopting business models that involve loss leaders (e.g., a steak) and high margin complementary goods (e.g., alcohol, appetizers, salads). As an example, Waffle House probably makes more profit selling eggs on a percentage basis than it does selling steaks. Mario Batali’s restaurant partner Joe Bastianich says:

Restaurant math is easy. Appetizers cost only a small part of what customers are charged; desserts are almost pure profit. Linen is enemy No. 1 because buying and cleaning tablecloths and napkins is expensive and customers don’t pay for it, just as they don’t foot any of the bill for bread and butter. Übermeats” such as dry-aged steaks (‘the King Lear of menu items’) and veal chops are the bane of every restaurant because the initial food cost is high.”

Waffle House has undoubtedly made a lot of profit on real estate. A former McDonald’s CFO was once quoted as saying, “We are not technically in the food business. We are in the real estate business.” It is not uncommon for a restaurateur to retire based on real estate profits instead of what he saved from selling food. The land value alone of the Waffle House real estate portfolio is probably huge.

Even though the founders did not want to create take out restaurant, Waffle House works hard to turn tables fast. A food order is expected to be in the kitchen before eight minutes have passed and the customer out of their seat in less than 20 minutes. To achieve this goal the founders created systems for the business that are all about efficiency. Andrew Knowlton wrote in his profile of Waffle House after spending 24 hours in a row there as a worker:

“Pull” means to pull whatever meat they indicate from the fridge (e.g., “Pull two sirloins, one bacon”). They then yell “Drop,” which indicates how many hash browns to drop on the grill (e.g., “Drop three hash browns, two in the ring!”). And finally there is the “Mark,” which tells the grill operator what the actual combination is. The server might holler, “Mark steak and eggs medium over medium on two, country ham and eggs scrambled!” (a steak cooked medium with eggs over medium, and scrambled eggs with country ham).”

Waffle House sales associates are told to stand on a mark when they call their order. Typically the mark is one red tile on the floor surrounded by grey tiles. This system allows only one sales associate to call an order at a time and lets the grill cook know where orders will be coming from.

“Think about the New York Yankees—they’ve worn the pinstripes forever. They’ve never changed their logo. A team like the Padres or the Diamondbacks—every season they’re wearing something different. They’re struggling to find an identity. There are restaurant companies going through the same metamorphosis. They’re chasing the next chic fad because they don’t have an identity. We haven’t had to chase an identity because we’re confident in who we are, and it works for us.” Mark Miklos, Waffle House employee.

Below the gross margin line Expenses like advertising that reduce profitability of a business below are kept to a minimum by Waffle House’s limited advertising policy. The Waffle House’s bright yellow signs are distinctive and easily seen from the freeway. People know what will be on the menu at a Waffle House. Few people ask themselves: “What kind of food does that Waffle House serve?” or “Will they shave truffles on my waffle?” John T. Edge writes in his book: The Larder:

edge

“When I got in this business, food was number one—you got all your complaints about your egg not being cooked right. All the complaints now are on service. So we’re in the service business more than we’re in the food business. We kill ‘em with kindness and survive ‘em with a little good food. Why, I’m such a good service man, I can give you a hamburger without any meat in it and you wouldn’t know it until you get down the street.” “At Kress, I began to learn right off how a successful business operates. Woolworth had a bigger store up the street, but our store manager, Mr. Haskew, taught me perhaps the most important business lesson I ever learned: You never lose a satisfied customer. Mr. Haskew made sure everybody in his store smiled and treated even the sourest customer tenderly.” “People never get tired of having their egos built up. You tell them something good about themselves, and they’ll come back for more.” Joe Rogers, Sr.

Great service is the best way to print money from thin air. It does not costs anything to be nice to someone. Ray Kroc of McDonald’s famously once said “Look after the customers and the business will take care of itself.” Some people have a knack for making people happy. I had a friend who people said could fire someone and they would not know that it happened until they were at home explaining it to their spouse. I don’t think he ever actually did fire anyone, but it made for a good story. Jim Barksdale used to say that this fellow could: “Talk a dog off a meat truck.”

“We would rather raise our babies from the start.” Bert Thornton, Waffle House’s vice chairman emeritus.

Restaurants inevitably face the question of whether it should own all its own facilities or become a franchise operation, either in whole or in part. Waffle House has some franchises. Bert Thornton has said: “the list of people trying to get into the WaHo biz is “very long and very distinguished.” The company owns about 80 percent of its more than 1,800 locations and has stringent franchise conditions that deter most prospective operators. Typically, only expansion plans from existing—and particularly successful—franchisees are considered. The reason, Thornton says, is that WaHo is dedicated to maintaining consistency from one location to another.”

“We were driving near Augusta National, and I saw a Waffle House on one corner. But the remarkable thing was that just across the street there was another Waffle House on the next corner! I turned to Joe, puzzled, and asked him, “Joe, why’d your dad do this?” He said, “My dad’s a great fisherman, and he loves to fish. He always thought that if he got into a fishing hole and the fish were really biting, he’d put another line in that hole. So here, we had one location that was doing great, so we decided, let’s just build another one right across the street!” Joe Rogers Jr., as told by Fran Tarkenton

This is a good explanation of why there are so many Starbucks in a neighborhood, often across the street from each other. It is also an example of an important business principle: if you have an idea, test it and if it works, do more of it. One bigger store can be less profitable then two smaller store. It depends. This would not be a 25iq post unless I talked about wholesale transfer pricing. How does Waffle House deal with this scourge of the restaurant industry? An industry analyst writes: “The real estate subsidiary reflected Waffle House’s hefty property holdings: unlike many other chains, Waffle House owns much of the property on which its restaurants were built.” There is no better solution to the wholesale transfer pricing problem than owning the building. But if you have two leased stores that are not far apart, at least you can always shut one of them down if the rent gets too high.

“Joe said, ’You build a restaurant and I’ll show you how to run it.”’ Tom Forkner “I’m not an executive, I’m a waffle cook.” Joe Rogers, Sr.

Having partners who balance your skills and interests is a very good thing as the Waffle House example proves. No one is best at everything and we all have weakness and strengths. Diversity in the broadest possible sense makes a team stronger.

“I have always worked on the idea that if you have something to worry about, you get up and go fix it. I’ve never been a worrier.” Joe Rogers, Sr.

There are some people who just get things done. If there is a problem they get in the car or on a plane and fix it. Some people are builders and fixers and other people are just talkers. Great business founders are all builders and fixers since they are typically missionaries about their business. Yes, some mercenaries do well financially, but they are never just talkers.

We’re not in the restaurant business. We’re in the people business.” “In the restaurant industry a bonus system must be self-monitoring and deal only with facts. All areas of judgment by a friendly or unfriendly supervisor should be absent in a bonus system.” Joe Rogers, Sr.

A fast food business is not a glamorous business and many workers in that industry live a hard life since wages are low. You can see the wages of Waffle House workers on Glasdoor as you can for most any business today. Solving that food services wage issue is not something I can do in this blog post. But it is an important issue. Joe Rogers Sr. said once about his lower paid employees:

“Most of our waitresses have hard lives. A lot of them have a bunch of kids at home, and maybe their husbands don’t have good jobs. We can’t solve all their problems, but we can listen to them.”

Workers in Waffle House can move up. Everyone in Waffle House management starts as a unit manager. The company web sites states: “There are 5 major levels of management at Waffle House:

Unit Manager – 1 unit

District Manager – 3 units

Division Manager – 8 – 9 units

Area Vice President – 43 units

Senior Vice President – 100 -120 units

Our management team is “home grown” meaning we only promote from within the company. Everyone on our management team starts as a Manager Trainee with the intent of managing one restaurant upon completion of training. All managers are subjected to an intense 12-week paid training program. During that time, they are taught every aspect of operating a Waffle House, from waiting tables, to cooking, to analyzing the P&L statement.

“It’s our policy never to share information with the press.” Joe Rogers, Jr.

The business of the Waffle House has become quite large, but since it is privately-held, analysts are only guessing about the profitability of the business. One recent guess that appeared in The New York Times was that Waffle House: “had sales of a little more than $1 billion in 2015.” Other revenue estimates for the company are similar. But they are guesses.

“There are three types of companies,” explained Bryan Elliott, analyst at Robinson-Humphrey, in the September 19, 1988 Atlanta Business Chronicle. “There are public companies that trade stock and have to share information. Then there are private companies that don’t trade stock but are somewhat open about their operations and numbers. And then there are the companies that won’t even acknowledge that they exist. And that is Waffle House. They are a very, very private and tight-lipped company.”

P.s., I hope that this blog post on Waffle House is better value for money than the Harvard Business School case on Waffle House that I have not read. If not, then you can have double your money back!

Notes:

My blog post on restaurant business models generally is here: https://25iq.com/2016/11/18/why-moats-are-essential-for-profitability-restaurant-edition/

https://www.wafflehouse.com/history/

https://www.bonappetit.com/restaurants-travel/article/24-hours-waffle-house

http://www.atlantamagazine.com/great-reads/waffle-house-became-cultural-icon/

https://www.nytimes.com/2017/03/07/business/joseph-rogers-died-waffle-house-co-founder.html

https://ipfs.io/ipfs/QmXoypizjW3WknFiJnKLwHCnL72vedxjQkDDP1mXWo6uco/wiki/Tom_Forkner.html

http://www.nbcnews.com/id/8927443/#.WewhQmhSzSF

http://www.espn.com/college-football/story/_/id/21067022/college-football-saturday-sec-country-waffle-house

https://www.thrillist.com/eat/nation/waffle-house-12-things-you-didn-t-know-about-the-southern-breakfast-chain-thrillist-nation

http://www.statesman.com/news/national/things-you-didn-know-about-waffle-house/40jR4BuZqTxmy9NKmmaa5J/

http://www.accessatlanta.com/entertainment/dining/things-you-didn-know-about-waffle-house/oaO7SNnMuflpvLl4ZptBPL/