Background
Danny Meyer is the founder of Union Square Hospitality Group (Union Square). Danny opened his first restaurant, Union Square Cafe, in 1985. He has grown from one restaurant to having over fourteen different restaurant concepts, including Shake Shack (over 400 locations; now its own public company) and Eleven Madison Park (considered one of the top restaurants in the world; divested in 2011).
Setting the Table covers Danny’s childhood, the early days of his restaurant career, and his business philosophy: Enlightened Hospitality. It’s a short-read and if you have any interest in building brands, food, or New York City then I’d recommend checking it out.
Before jumping in, I wanted to remind readers that the purpose of this post is not to summarize the story of Union Square. Setting the Table does a much better job at that. Instead, the purpose is to dig into certain decisions that Union Square made and try to understand how those decisions fit into the overall strategy of the company. Today, we will be analyzing Union Square through Jim Collins’ Hedgehog Concept.
Hedgehog Concept
Jim Collins argues that it is much better for a company to be world-class at one thing than it is to be good at many things. He builds this framework on an ancient Greek parable about a fox and a hedgehog. Foxes are good at many things: they are fast, cunning, and have sharp teeth. The hedgehog is none of these things and on the surface, the hedgehog should be an ideal prey for foxes.
However, the hedgehog is world-class at one thing: curling up into an inpenetrable ball when feeling threatened. No matter how sneaky the fox is or how hard it tries to bite, the hedgehog can curl up into a ball and protect itself.
Extending this concept to business, Jim Collins believes that every company needs to figure out their own Hedgehog Concept. More specifically, a Hedgehog Concept needs to satisfy three criteria:
What drives your economic engine?
What can you be the best in the world at?
What are you deeply passionate about?
Hospitality
Without ever explicitly stating it, I think it’s pretty clear at Union Square’s Hedgehog Concept is to become the restaurant group with the best hospitality in the world. The food is good and the prices are fair but you come to one of Union Square’s restaurants because of the hospitality.
Economic Engine
It’s important for a company’s Hedgehog Concept to be tied to their business model. If a company can’t make money doing something, being the best in the world at it won’t help it grow. If you look at the great companies of the past, I bet you can identify what they were world class at and tie it directly to how they made money.
Repeat diners
By focusing on hospitality, Union Square can increase the amount of repeat diners that they have. In the book, Danny mentioned several different diners who would eat at Union Square Cafe multiple times a week for over a decade. I bet he had several customers who had eaten at his restaurants over 1,000 times each.
To throw some numbers around this, if most restaurants have customers who come 5 times in their life and spend $20 a visit, their customer lifetime value (LTV) is $100. If Union Square can increase that number to 25, their customer LTV is $500. For the extremely loyal regulars we mentioned above, the customer LTV is around $20,000.
If Union Square was in the car business where people buy two or three cars in their life, then building a company around hospitality might not make sense. Even if you delivered an incredible experience, it probably won’t move the needle on LTV. By the time you buy your next car, you may have moved cities or simply forgotten the great customer service you had ten years ago. But it works perfectly in the restaurant industry where people need to eat every single day and in New York specifically, where most people eat out multiple times a week. If you had a great meal at Union Square Cafe, you might even come back the next day.
Word-of-mouth
Not only does hospitality increase Union Square’s LTV, it also decreases its customer acquisition cost (CAC). Danny talks about many times that his employees go above and beyond for a customer. One time, a patron left their purse and phone in a taxi right before arriving at Union Square Cafe. They immediately offered to extend credit to her so she could still have her meal and while she was eating, the staff continuously called the customer’s phone until the cab driver picked up. They then sent a staff member to meetup with the taxi driver and had all of her belongings back to her by the time dessert arrived.
While Danny doesn’t offer up any data to back it up, he claims that incidents like this drove incredible word-of-mouth business for his restaurants. Word-of-mouth advertising works incredibly well in an industry with high trialability like the restaurant industry. People are always looking to try a new restaurant and the worst thing that happens is they overpay for a bad meal.
Again, this would not work well in the car business. It’s a lot riskier for someone try a brand new car company when the sticker price is thousands of dollars and if you don’t like your car, you are stuck with it for years.
Unit economics
My point in bringing these up is that I think Danny did a great job of choosing a core value that fits his industry. By focusing on hospitality, Union Square was able to improve two key levers in their business model. While some people might read the book and conclude that all companies should be more hospitable, my takeaway is that knowing your industry and choosing a Hedgehog Concept that makes sense to your industry is crucial.
Can they be the best?
Just because it makes sense to be the best in the world at something doesn’t mean that they can be. I know I would make a lot of money being the best basketball player in the world but no matter how hard I try, I know I will never be able to do so. As Jim Collins said, “Every company would like to be the best at something, but few actually understand—with piercing insight and egoless clarity—what they actually have the potential to be the best at and, just as important, what they cannot be the best at.”
Enlightened Hospitality
In order to be the best in the world at hospitality, Danny created a business philosophy called Enlightened Hospitality. With Enlightened Hospitality, Danny created a clear hierarchy of needs for Union Square:
Employees
Customers
Community
Suppliers
Investors
While this might seem like an overly grandiose philosophy, I think it is a perfect example of aligning the business around hospitality. While most companies will say the customer is most important, Union Square realized that you can’t create a hospitable environment without first taking care of your employees. This works incredibly well in the restaurant industry where your customers directly interact with reservationists, hostesses, waiters, and busboys during their time at a restaurant.
Their focus on community is another extension of hospitality. They want to create an authentic connection to their diners that keep them coming back (increasing LTV) and they can better do this by focusing on their community. You can even see it in the same of their first restaurant: Union Square Cafe. It’s simply the cafe for the community it is located in.
If they are also known within their community, Union Square gets more free, word-of-mouth advertising (lowering CAC). Focusing on community would not make sense in an online business format, where your customers are all across the globe.
The focus on suppliers is where I think the message turns a bit into a marketing hype machine. There are several successful companies (Amazon and Walmart, for example) who rely heavily on their suppliers but are known for driving incredibly hard bargains with them.
The focus on investors last is a further acknowledgment that they want to be long-term greedy: the best way to have a successful restaurant is to focus on employees, customers, the community, and suppliers first. Without those four, the investors won’t see a dime.
51 Percenters
In addition to creating a business philosophy aligned around hospitality, Union Square created a hiring philosophy too: the “51 Percenters.” This term originated from a focus on both technical skills (the 49%) and soft skills (the 51%). By breaking down the numbers this way, Union Square acknowledges that technical skills are important but that soft skills are paramount.
Again, this hiring philosophy might seem overly grandiose but it actually fits incredibly well with the business philosophy and the core values of the company. You can think about the Hedgehog Concept (hospitality) as what they want to do, the business philosophy (Enlightened Hospitality) as how they are going to achieve it, and the hiring philosophy as who they are going to achieve it with. They are all aligned and give Union Square the ability actually be the best at hospitality.
Are they passionate about hospitality?
Just because you can make money doing something and you are extremely talented at that thing, doesn’t mean you will be the best in the world at it. Will is almost important as skill and at the end of the day, you need both. It’s hard to judge passion from reading a book but there were some sections that helped shed light on Union Square’s passion.
Danny’s upbringing
Danny grew up in the hospitality industry. His father ran a tour agency in Italy and France and he saw firsthand the importance of having a loyal client base. Danny worked at his father’s company while he was in college and then went into a sales position (where customer service is also crucial) after graduating. I believe that Danny has a genuine interest in people and really is passionate about delivering a great experience. At a company like Union Square, it’s important for the leader to exemplify the core values.
51 Percenters
Going back to their hiring philosophy, Danny had a great quote in the book about who they were looking to hire: “It’s not hard to teach anyone the proper way to set a beautiful table. What is impossible to teach is how to care deeply about setting the table beautifully.” Instead of trying to train or instill passion into the company, Union Square tried to hire for it.
Selective expansion
Going into the book, I would not have described Union Square as being selective in how the expanded. After all, they have a three-star Michelin restaurant, a large burger chain, a barbecue restaurant, and an Indian restaurant. But what I didn’t know about is the hundreds of opportunities they turned down in between.
Danny talks about being approached by airports, sports venues and hotels across the world with very favorable terms to open a restaurant. While some companies would have accepted this “free money,” Union Square realized that doing so would dilute their brand. If their restaurants are all about creating an authentic connection with their customers and community, how would that work in a Las Vegas hotel or an airport terminal? By saying no to these opportunities in the short-term, they were able to preserve their brand that they worked so hard to create.
I believe this is another example of their passion for hospitality. If they were not truly passionate about delivering world-class hospitality, I think they would have been tempted to say yes to some of these expansion opportunities.
The big contra-example to this is Shake Shack. The book was written far before Shake Shack expanded from a single location (with a real connection to its community) to over 400 locations so we don’t hear directly from Danny on this. However, it is worth noting that Union Square did turn Shake Shack into it’s own company. At the very least, this created some distance between how Shake Shack is run and the rest of the hospitality group.
Conclusion
Overall, I think Union Square did a great job of creating a clear Hedgehog Concept that allowed the company to excel. By focusing on hospitality as their core value, they were able to push important economic levers in their business. They also created clear business and hiring philosophies that hired and motivated people who had both skill and passion for hospitality.
Not an overnight success
Lastly, I was surprised to see that Danny actually waited nine years before opening his second restaurant. Jim Collins talks a lot about how it can take years for a company to define its Hedgehog Concept and Union Square was no exception.
There were plenty of mistakes in the early days and for the first few years, Enlightened Hospitality was just a rough concept in Danny’s head. It wasn’t until much later that he fully fleshed his ideas out into business and hiring philosophies that he rolled out to the whole company. After nine years, Union Square opened Gramercy Tavern and then waited another three years before opening anything else. Once they got their flywheel going, they then starting putting their foot on the gas opening another three restaurants over a short period of time.