Since I have already written blog posts about the “food television” personalities Anthony Bourdain and Alton Brown, I decided to write one about David Chang. If you don’t know who Chang is, Time magazine has an excellent written profile. A few sentences from that article provide a brief biography of his early career:
“It may surprise you to learn that the Korean-American rebel chef David Chang, known for his delicious, creative food and brash, edgy attitude, majored in religion at preppy Trinity College in Hartford. … 9/11 had a lot to do with pushing him toward that goal a few years later. He knew people who died in the attacks, and it led him to wonder what really mattered and what should keep someone from taking a risk. Opening a restaurant was suddenly less scary, since the worst thing that could happen was failure. “Failing just seemed like a good idea at the time,” he says. In August 2004, Chang opened Momofuku Noodle Bar, in New York’s East Village, where he dedicated himself to two simple staples: ramen bowls and pork buns.”
Forbes described what came next:
“Chang has become the Meryl Streep of the James Beard Awards–he has won five in the past eight years, including Outstanding Chef in 2013…. Chang has long ago crossed over into pop culture: He starred in the PBS food series The Mind of a Chef , played himself convincingly on HBO’s Treme and appears in commercials…”
The customary quotes from Chang follow in bold, which give you even more color on his other businesses:
- “When we opened Momofuku Noodle Bar in 2004, design was the last thing I was concerned about. It was 600 square feet, 27 seats and stools from this web company. If I could have afforded décor, we would have. Everything in the existing restaurant from the get-go was by default from what we could afford, which was nothing. And that’s why there is no décor as we know it. Momofuku Noodle Bar became an exercise in what we don’t need.” “I was way too young. I didn’t know enough – I needed to prove things to myself that weren’t culinary; there was a lot going on in my life. I made an extraordinary number of mistakes.”
With his first business Chang turned a lack of funds into an advantage. He worked backward by necessity – he assessed how much money he had to invest and from that determined the products and services he offered. A lack of money was a spur to creativity for Momofuku rather than an impediment. Danny Meyer, the founder of Union Square Hospitality Group has said of Chang’s influence: “He’s liberated hundreds of young entrepreneurial chefs to open places they can afford to open.” What Chang did in opening his first restaurant was essentially conduct an experiment and this particular experiment found product/market fit. Every business startup is an experiment in some way and Chang’s experiment was a spectacular success. What we do not know or remember well are all the other experiments that failed. That forgetting process is called “survivor bias.”
Discovering product/market fit is absolutely essential and yet so often forgotten. Businesses that have too much money too often charge off trying to grow the business before they have found product/market fit and then die due to premature scaling. To continue the food analogy, many businesses die of indigestion even though it may seem like they died from starvation. Some businesses just never find product/market fit, which must include a profitable business model that flows enough free cash. For example. Chang’s Lucky Peach publication was a fantastic product for people like me who love to learn about food, but it could not generate enough cash to survive.
There are many interesting questions about Chang’s rise to fame: How much of the popularity of the restaurant’s Spartan décor and limited menu was the product of luck versus skill? What would have happened if Momofuku did not get the well-timed glowing review in The New York Times? Certainly Momofuku’s success feed back on itself creating cumulative advantage benefits in other aspects of his business career. Success breeds more success. In a digital world this this feedback effect has been radically amplified, which effect is having enormous social implications that at some point will be the subject of another blog post.
- “My father and his friends pitched in the money, initially $130,000; we paid it all back in the second year.” “Had I done better at school, I don’t know if I would have been a chef. It was the one profession that embraced me.” “I was terrible at desk jobs. After college, I had a financial job—very briefly.”
Why did Chang start Momofuku? Chang has said he was attracted it because it was a place where people who did not fit in elsewhere can become stars. He said once in Forbes: “I thought: I can’t have an influence in fine dining, but maybe I can help pockets in the underground of the culinary world’–I remember telling my shrink that for sure.”
What do academic studies say about why people become entrepreneurs? Hedge and Tumlinson wrote in a recent paper on this topic entitled: “Asymmetric Information and Entrepreneurship”:
“Individuals signal their unobservable ability to employers (e.g., via educational qualifications). However, signals are imperfect and individuals whose ability is greater than their signals convey to employers choose entrepreneurship. Our empirical analysis of two separate nationally representative longitudinal samples of individuals residing in the U.S. and the U.K. supports the model’s predictions that (i) entrepreneurs have higher ability than employees with comparable signals, (ii) employees have better signals than equally able entrepreneurs, and (iii) entrepreneurs’ earnings are higher and exhibit greater variance than those of employees with similar signals.”
Hedge and Tumlinson make several other points in their paper including this one about why immigrants start so many companies and another about why friends and family are often the financial backers of early stage businesses:
“Our findings may also explain why several groups with less credible ability signals, such as immigrants, gravitate toward entrepreneurship, and why families and friends are a dominant source of financing for early stage ventures when asymmetric information about entrepreneurs’ quality is greatest.”
Some entrepreneurs are motivated by their displeasure with a typical office work life or by the fact that such a desk life on a traditional office was not open to them as a career. Chang gradated with a BA from Trinity College where he majored in religion. But having said that, is there a special driver for people who are not college graduates for whatever reason since academic success is not a requirement for success as an entrepreneur? Many successful entrepreneurs are high school graduates or only attended college for a short time. I am not advocating that anyone stop their education at any specific point, but rather saying that more education beyond a point is not a requirement to becoming a successful entrepreneur. If you did not graduate from college for some reason, starting a business is very possible.
3. “The culinary world is a very tough business. But if anything, at its core, what I love about it is the fact that it’s a little bit of everything, alright? You need to tie in so many different parts of culture. It’s a little bit of craft. It’s a little bit of being an artist. It’s a little bit of being a businessman. It’s a little bit about being a farmer. It’s a little bit of being a showman. And I think that’s what makes it sometimes the best job in the world.”
If you read even a few of the many profiles of entrepreneurs on this blog you will see a lot of similarities, but also in each case some key differences. These entrepreneurs know the best practices in their business, but also when to break them in some important way. That selective rule breaking is where successful innovation comes from. Wolfgang Puck said in the pizza episode of Chang’s Netflix series Ugly Delicious: Wolfgang Puck: “If you know the basics, if you know your profession really well, then you can navigate and try other things. They say, ‘An Austrian making pizza? What the heck?’”
Puck has a great story about how he decided to get into the frozen pizza business based on customer feedback:
“Johnny Carson used to come in on Friday nights and get 10 or 12 pizzas to go. After the third or fourth time I said, ‘Johnny are you throwing a party?’ And he said, ‘No, I’m putting them in my freezer. I said, ‘What the hell!? You put my pizzas in the freezer? I’m not going to make them for you anymore.’ I was so upset but then finally, I tried it for myself, and said, ‘You know what? Maybe it’s not quite as good as what we have at Spago, but it’s pretty good.’”
Another chef profiled in Chang’s Ugly Delicious series is an example of someone who learned the basics an then decided to innovate via experimentation. He said during the episode: “If you only look at how it used to be done or how it’s supposed to be done, you don’t allow yourself to move it forward.” He now has his own Jersey cows as a source of milk for his house-made cheese and makes a sourdough-based pizza dough. The chef described how he learned to make mozzarella: “A lot of YouTube, a lot of research, a lot of experimenting, and a lot of shit mozzarella.” Chang puts it this way: “It’s imperative that we learn the scientific process and document what happens. I want people to own their mistakes and to just go for it–really great flavor comes from the failure.”
- “Razor-thin does not even begin to describe just how slender the margins are in the restaurant business, and that’s if you’re one of the fortunate few that don’t go under in the first year. If you’re lucky, small single digits. Like, the smallest single digits. It’s legitimately one of the dumbest businesses you could possibly get into. Restaurants are at the mercy of weather, acts of God, a sluggish economy — and if you have just one bad week, it can sink your ship. Lately, rising rents and changes in labor laws have made it even harder. And I say that as someone who has done OK! Imagine how insanely daunting this business is for most everyone else.”
I have already written a blog post on how hard the restaurant business can be financially and otherwise given factors like the level of competition due to low barriers to entry and wholesale transfer pricing power of landlords. To illustrate just one aspect of this point, in the fried chicken episode of Ugly Delicious Chang talks about a very popular and profitable “Memphis hot chicken” chain restaurant named Hattie B’s with the owner of two restaurants named Bolton’s Spicy Chicken & Fish which originated the recipe and style. Chang asks the owner of Bolton’s if she would consider opening a restaurant in a “more affluent community like Hattie B’s and she answers: “Yes, but everybody can’t afford that $4,000, $5,000 rent.” Making matters even harder for people like her is that fact that well-known chefs can sometimes obtain concessionary lease terms from landlords if they have a brand which can attract building tenants. That puts more competitive pressure on other restaurateurs who do not have the clout to be an anchor tenant and must pay market rate rents.
- “‘There’s the common misconception that restaurants make a lot of money. It’s not true. If you look at maybe the top chef in the world, or at least monetarily, it’s like Wolfgang Puck, but he makes as much money as an average crappy investment banker.” “Why are we having a shortage of cooks if we have more culinary school entrants than ever before? If I’m a prospective culinary school student and they [actually] tell me that 50 percent of our students aren’t in the culinary profession after five years. Well, I’m not going to probably enter that university. But the reality is I think that number is much higher than 50 percent.”
Not everyone who is famous is as rich as many people think they are. This can happen for a number of reasons. Some businesses are scalable and have high profit margins and some are not. Some entrepreneurs are frugal and re-invest their income well, but some do not. Some entrepreneurs dilute their equity early and some do not. It depends. One thing about the industry is clear says Chang:
Intense competition between restaurants drives down prices and wages. In his classic “Five Minute University” routine on Saturday Night Live the comedian Father Guido Sarducci pointed out: “Economics? Supply and Demand. That’s it.’” Charlie Munger puts it in context: “Microeconomics is what we do, and macroeconomics is what we put up with.”
People who graduate from a culinary school with or without debt are looking at a career that has very few people emerge that end up doing very well financially like like Chang. Chang is saying that most of them will leave the profession altogether. They have a better chance of playing in the NFL than becoming a food television personality. As Anthony Bourdain likes to say and write about, being a chef is hard physical work where the objective is consistency. There is very little glamour in the kitchen. Salaries are low and the restaurants regularly fail. Chang says: “I would say that in any given kitchen, with a grain of salt, 90 percent of the day is organizing and cleaning. And 10 percent of the day is actual cooking.” Chang also has a strong view on whether someone must go to culinary school: “You name a chef that’s awesome and people want to work for him, I’d say a majority of the time they never went to cooking school. Whether it’s Ferran [Adria], Heston Blumenthal, Alain Passard, Michel Bras, Corey Lee, Daniel Patterson. The list is pretty long.”
- “I’m grasping with how you do something on a large scale with multiple operations and not have quality decrease.” “How do you build the right culture to scale?”
The output of a business that requires many people to have a high degree of skill to produce what it sells it is hard to scale. Well crafted systems and the right business culture can help with that scalablity problem to some degree, but that only goes so far. It is particularly hard to scale a fine dining business since the people hired in new locations have a hard time replicating the quality of the original business. Of course, chain restaurants like McDonald’s try to solve this problem. Chang says in Ugly Delicious that Dominos is really more of a food distribution business than a restaurant (even though he says their pizza is comfort food for him that he enjoys eating it). Chang points out that there are many restaurants that make a better pizza, but their businesses can’t scale like Dominos.
- “Getting to be a successful business and maintaining it is so hard. Anyone can be good one night, being good over several years is incredibly difficult.”
Harvard Business School Professor Michael Porter has said about what Chang is talking about:
“It’s incredibly arrogant for a company to believe that it can deliver the same sort of product that its rivals do and actually do better for very long-if customers have all the power, and if rivalry is based on price- you won’t be very profitable. Produc[ing] the highest-quality products at the lowest cost or consolidate[ing] their industry [is] trying to improve on best practices. That’s not a strategy.”
Every business must deal with this simple fact of life: If you have too much supply of a given product or service, price will inevitably drop to a point where there is no long-term industry profit above the company’s cost of capital. Sometimes you will hear a knucklehead say moats don’t matter since all that matters is delivering better customer value via execution of a plan. The idea that the supply of alternatives to what you sell does not matter in a business is (1) insanity or (2) inevitably argued by someone who has never actually ran a real business or has not done so for very long. In the real world, competitors eventually can copy a plan of execution that has no barriers to entry. A moat is a “sustainable competitive advantage” that goes beyond execution to limit competition since it is structural. That is why it is so valuable. A business that even your lazy and shiftless cousin could run is significantly more valuable than a business that requires a first-class manager to run flawlessly day after day and year after year. As Buffett says: “When a management team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”
- How the restaurant industry has worked in the past will not work going forward.” “The future of dining in New York, and maybe America at large, is certainly going to be affected by delivery. If mobile technology has already changed how you get your mail and your dry cleaning and everything else, of course it’s majorly disrupting how people get their food.” “There’s a lot to figure out, and lots of mistakes to be made. At the end of the day, it’s really hard. It’s an extraordinarily difficult business that someone is going to win.”
Since basic demographic limitations put a cap on the overall growth of the restaurant industry, especially in a place like the United States, people are often thinking about new ways to make it grow. A profile of Chang in Entrepreneur describes the situation:
“American restaurants took in around $800 billion in revenue last year, but sales have stagnated at a time when costs continue to rise. The number of independent restaurants is shrinking at a rate of 2 percent a year. For quick-service restaurants — the industry’s best-performing segment these days, encompassing chains from McDonald’s to Sweetgreen — traffic is expected to grow by a meager 1 percent in 2017. None of this bodes well for the current order.”
In an attempt to find a way to grow profits in the food business Chang was an investor in the food delivery company Maple and was even more involved in a business called Ando. The former business closed without finding any financial success and the latter was involved in a “mercy merger” with another delivery provider. I have written a blog post already about the rough economics of the food delivery business. It is a hard knock life. Will mobile tech change the food world? Most certainly since it already has. But for a business in this sector to be significantly profitable it will need some sort of barrier to entry.
- “The livelihood of the restaurant is dependent upon getting the word out.”
David Chang is everywhere in the media. You can see evidence of this by looking at the many interviews cited in the End Notes to this blog post. He is a colorful quote machine and a showman in his own counterculture way. The media profile Chang has developed creates cheap “brand impressions” for his many businesses. Those brand impressions are a substitute for advertising as I have written about in other blog posts, including the post on Sammy Hagar that appeared recently. Not having to buy advertising when competitors must do so is a very good thing for profit margins.
- “If getting rich were all that mattered, we could have already sold off ” “Over the years, if it was just about the money, I literally would have sold out–literally would have sold the company. We’ve had many, many, many offers. I understand how lucky I’ve been and what an insane ride it’s been. One reason why I never sold the company or let someone give me a ton of money just to grow it obnoxiously, is that I was the only one who was going to benefit.” I think for me the overriding principle is, we have the opportunity now where we can do better. Like paying our line cooks generally $25-$30 an hour, and not be limited by $15 an hour. And my sous chefs all get paid $100,000 minimum. And my managers. And can we start paying our purveyors what they should be getting?”
Great entrepreneurs that are missionaries love their business and the people who work for them. When missionaries do sell their business they often seek to find a buyer like Warren Buffett who will not treat the business as an opportunity to create the equivalent of a strip mine. Another reason Chang has not sold Momofuku is that he does not want Momofuku to become the next Taco Bell. I do find it interesting how quickly musicians sell the rights to their songs for commercials these days. For example, the speed at which something like a Bruno Mars song appears in a peanut butter commercial is faster a child can eat a fresh jar of Skippy. Would a Momofuku chain restaurant that appeared in places like airports spoil Chang’s brand? Would he be able to look at himself in the mirror and not cringe?
- “Cooking and gardening involve so many disciplines: math, chemistry, reading, history.”
Investing and running a profitable business also involve many disciplines. The more you know about more things in more disciplines, the better your judgment will be, and not just about business. Charlie Munger has adopted an approach to business and life that he refers to as worldly wisdom. Munger believes that by using a range of different models from many different disciplines—psychology, history, mathematics, physics, philosophy, biology, and so on—a person can use the combined output of the synthesis to produce something that has more value than the sum of its parts. Someone like Chang loves to learn. He actually has fun when he is learning, and that makes the worldly wisdom investing process enjoyable. No one can know everything, but you can work to understand the big important models in each discipline at a basic level so they can collectively add value in a decision-making process. Simply put, people like Chang who think very broadly and understand many different models from many different disciplines make better decisions.
I very much like the way a pit master describes in his craft in the barbecue episode of Chang’s Ugly Delicious series on Netflix. The pit master might just as well have been describing business or investing:
“Unless you invented fire, you didn’t invent barbecue and you don’t own it. I don’t have the right to define what barbecue is. Real barbecue is whatever you make it. People need to have an open mind. If you want to be one of the best, then you need to be evolving and understand that you don’t know everything. Barbecue has become this thing that the further I waded into the swamp, the further I want to go, because I think there’s that much more to know. And that’s been a really fascinating, fun part. The more people I talk to, the more there is to learn and then take back home and try to put into practice and see what I can make sense out of.
Investing and business for me are like barbecue is for that pit master, but I would like to know that much about barbecue too though. I sometimes wonder whether I would rather cook or eat. I do know that if my mother ever passes away, god forbid, I will cook and make raspberry jam until I feel that she is with me again.
- “Wait, why do we charge a bowl of noodles 50 percent less than a bowl of pasta?” Why is that true when they’re essentially the same thing?’”
What Chang is talking about is what Buffett calls “pricing power.” He has said: “The single most important decision in evaluating a business is pricing power.” These specific pricing power questions asked by Chang are hard to answer with certainty. Anthony Bourdain similarly complains that people are reluctant to pay high prices for something like high end Mexican food, but they are often willing to do so for certain types of European cuisine in a fine dining restaurant. To raise the profile of this set of questions, the writers of Ugly Delicious created this mock debate in the last episode of season one:
“Tonight, we pose the question, Italian stuffed pastas or Asian dumplings? Representing the sides will be chefs Mario Carbone and David Chang.
David Chang: “If I had this plate, and I put it on a plate of ravioli – Like, three of them. Three of them. For three times the price.”
Mario Carbone: “Yeah, and it’s with ricotta and it’s delicious.”
David Chang: “I’d eat it, you’d eat it, but it’d be, like, 27, 28 bucks. [An equivalent Asian dish] is eight, nine bucks. Why is that? That’s the shit that gets me mad.”
Mario Carbone: “Well, it doesn’t get me mad.”
David Chang: “It just makes me feel like non-Asian people get bamboozled easier. ‘Cause I hope they do not catch on, and feel like they can Don’t tell them what Italian people are doing. ‘Cause if they start charging more, it would be, like, outrage.I think everybody knows that what you’re paying for is ambiance, and some bullshit story about where mushrooms came from the waiter.”
Mario Carbone: “Right. And people eat that shit up.”
David Chang: “I eat that shit up. But I don’t think anybody who really knows food, really thinks that that food is better.”
Some people will argue that the explanation of the phenomenon is racism. Others might say that it is mostly the intensity of restaurant competition in the particular style of cuisine. What are people paying for in a fine dining establishment anyway? How much of it is a show, how much if it is being able to say that you ate there and how much of it is the actual food? Charlie Munger believes that some aspects of the pricing power of a business are hard to explain or unravel and I will end this post on that note:
“If it’s a pure commodity like airline seats, you can understand why no one makes any money. As we sit here, just think of what airlines have given to the world – safe travel. greater experience, time with your loved ones, you name it. Yet, the net amount of money that’s been made by the shareholders of airlines since Kitty Hawk, is now a negative figure – a substantial negative figure. Competition was so intense that, once it was unleashed by deregulation, it ravaged shareholder wealth in the airline business. Yet, in other fields – like cereals, for example – almost all the big boys make out. If you’re some kind of a medium grade cereal maker, you might make 15% on your capital. And if you’re really good, you might make 40%. But why are cereals so profitable – despite the fact that it looks to me like they’re competing like crazy with promotions, coupons and everything else? I don’t fully understand it.” “Maybe the cereal makers by and large have learned to be less crazy about fighting for market share – because if you get even one person who’s hell-bent on gaining market share…. For example, if I were Kellogg and I decided that I had to have 60% of the market, I think I could take most of the profit out of cereals. I’d ruin Kellogg in the process. But I think I could do it.” “In some businesses, the participants behave like a demented Kellogg. In other businesses, they don’t. Unfortunately, I do not have a perfect model for predicting how that’s going to happen.”