The Pareto Principle
Pareto is an Italian restaurant that has refined its menu so that it now only sells the best selling 20% of its dishes. It has completely abandoned the other 80% of options that made up the cumbersome lesser-selling long tail.
Actually, I’ve just made this up, and Pareto is, in fact, a principle that most people will know as the 80/20 rule. This states that roughly 80% of consequences come from 20% of causes. Within business management, this is often simply translated as 80% of sales coming from 20% of customers, but it applies in so many other examples too.
So, what if a hospitality business was run on the basis of adhering to this principle wherever possible? Professor David Tyrrall, visiting professor at Staffordshire University, has investigated this business phenomenon in the brewing and pubs sector. He was instrumental in the introduction of small brewers’ relief (SBR) when he and colleague, professor Geoff Pugh, did some analysis for Gordon Brown and the treasury. SBR went on to fuel the craft beer revolution of the past 20 years.
When Tyrrall first came across the principle, he was studying the oil industry, where he found that 20% of the stock being held accounted for 80% of the value and concluded that it would be sensible for a business to manage this valuable 20% much more carefully and ensure there were never any out-of-stocks in these lines. More recently, he has been looking at the 80/20 rule and its role in the hospitality sector, where it could be applicable to ingredients that are essential to the core best-selling drinks and dishes.
Recent work by Tyrrall for the Society of Independent Brewers and Associates found that a mere four or five of the hop varieties used in beer by its members in the UK account for 80% of production, so questions could be asked about the myriad other varieties that represent only 20% of output. Is it worth the effort for the minimal financial returns?
Over recent years, brewers have found themselves occupied by the trend of cask beer sales falling while keg has been on the increase. Over this same period, there has also been a shift from beer in the off-trade moving from bottles to cans. But maybe the sector should not be too concerned about the way it splits, because cask and keg combined has consistently accounted for 80% of sales, while bottles and cans combined has generated the other 20%. Maybe the question they should be asking is whether it is worth the effort of dealing with packaged beer if it represents only 20% of sales and the margins are much lower than for draught.
Tyrrall also found that beer within the 3.5% to 4.5% ABV band accounted for approaching 80% of sales, so is it worth producing all those many other beers with strengths up and down the scale? Surely it is sensible to concentrate on the sweet spot. The same argument could be presented to pubs – why not just stock a range of these most appealing strength beers?
So, let’s turn back to consider our fake Italian restaurant, Pareto. At Wagamama, I’m reliably informed that the Katsu curry dish has historically accounted for as much as 40% of orders, and that the top handful of dishes has represented as much as 80% of sales, so what is the argument for continuing with the long tail of lesser-selling dishes on its menu? There would certainly be the opportunity for fewer chefs, reduced complexity in the prep, and reduction in potential waste from less popular dishes. So far, so good.
However, while a focus on the top 20% of an operation’s activities can clearly make sense, there are some obvious factors that would deter companies from pursuing such a Pareto-led strategy. What kind of business is comfortable stripping out innovation and relying solely on its existing proposition and the accompanying steady sales patterns?
Also, abandoning the treadmill of constantly developing new products could lead to the view that too many cooks are literally focused on the same broth. Whole management levels could be done away with as cheaper and more junior staff are trained to make the same 20% of dishes.
On the plus side, the business will be incredibly efficient and run in the most cost-effective manner, which is very valuable in tough economic times when operating costs and overheads are under the microscope. And those 20% of dishes will be consistently and excellently made in all outlets as all the effort goes into perfecting them.
However, despite the efficiency gains that operating to the 80/20 principle can undoubtedly bring, the idea of a hospitality industry that is totally bereft of innovation and unwilling to take commercial risks is a tad worrying for a gastro-explorer such as myself. While I’m sufficiently curious to make a visit, I’m unlikely to be a regular visitor to the Pareto restaurant.
Glynn Davis, editor of Retail Insider
This piece was originally published on Propel Info where Glynn Davis writes a regular Friday opinion piece. Retail Insider would like to thank Propel for allowing the reproduction of this column.