Value Is Relative
Value Is Relative
Competitive pricing is great for consumers, yes. But for shareholder value, we need to ask a different question.
In one chapter of our forthcoming book, Moonshot, my co-author James and I explore the idea of value and its relativity to dynamics in the wider marketplace. Lots of big words in that sentence, but here's the gist: a brand that may have seemed overpriced in a 'normal' macroenvironment can become 'value' in an inflationary environment if it doesn't respond to competitive price movements. This has important implications on brand equity.
Many of you will be familiar with First Watch, the national breakfast chain that employs 9,000 workers across its 378 stores in 28 states. Historically, I’ve struggled with finding value at First Watch and paying nearly $13 for pancakes with old fruit sprinkled on top.
But that was pre-inflation. But let’s put a pin in this while we dive into some financials.
Some Financial Details
First Watch Restaurant Group raised $280 million in their 2021 IPO, where the stock received the typical pop on its $18 a share offering price. Fast forward to today, and the stock closed at $18 a share this past Friday - essentially trading sideways for the last two years.
Interestingly the company is seeing dwindling cash flows, year on year, and despite trading at 68 times earnings, it’s market cap of just north of $1 billion is approximately the size of its total asset base. Read into that what you will.
Anyone who has had a brunch/breakfast meal out recently will know that its so easy to rack up a $60 bill as a party of two - a couple cups of coffee, two entrees, and a tip will do it.
In Q2, First Watch posted 160% earnings growth. Top line growth, however, fell slightly to 17%, down from 22% in the previous quarter. So where is the company spending all its money?
In its Q2 earnings guidance, the company outlined a play for 45-51 new system-wide restaurants, with capital expenditures in the range of $100 million to $110 million, invested primarily in new restaurant projects and planned remodels. So the company is clearly reinvesting in growth, but the relativity of value will come into play if the company doesn’t stay on top of its brand positioning.
Artificial Scarcity
Anything positioned as high-end or luxury rests on the idea of artificial scarcity. Rolex, the renowned Swiss watchmaker, serves as a prime example of the effective utilization of this concept.
Rolex has perfected the art of employing artificial scarcity to enhance the allure of its watches, elevating them to the echelons of luxury. This strategic maneuver involves deliberately limiting the availability of their timepieces, resulting in an air of exclusivity that resonates profoundly with discerning consumers.
Rolex's method revolves around a meticulous orchestration of production and distribution. By carefully controlling the number of watches produced annually, Rolex ensures that each piece receives unparalleled attention to detail and craftsmanship.
Moreover, their deliberate allocation of watches to select authorized dealers accentuates the sense of rarity. This calculated approach creates a sense of privilege among those who manage to acquire a Rolex timepiece, infusing the brand with a unique appeal that transcends mere material value.
Rolex's adept use of artificial scarcity underscores how scarcity itself can transform into a symbol of luxury. The restrained availability of their watches not only amplifies their desirability but also intertwines their brand with the exclusivity that affluent consumers seek.
Value is Relative
Reinvesting in store growth is one thing, down-marketing your brand image as a function of competitive forces is another, and its potential to affect the company’s balance sheet plans are profound.
First Watch, which to me was a higher-end breakfast play, seemed like a deal when my family and I went there this past weekend. Because I’ve become so used to paying $15 for an entree (hell, we paid $16 for a bowl of pho the other night), $13 for a tasty skillet and $13 for a ricotta lemon pancake seemed like a bargain.
The implications then are that First Watch no longer seems like a high-end experience to me, and instead becomes competitive with cheaper options (whose prices have gone up) such as Waffle House and others. Is that what the company wants as it continues to grow?
Competitive pricing is great for consumers, yes. But for shareholder value, we need to ask a different question: see above, the stock has traded flat for two years.
The Challenge of Growth
The challenge for First Watch going forward lies in the challenge of holding onto its initial brand positioning while becoming ubiquitous. Allbirds, the popular shoe company, faced the same dilemma when it went public. Grow into its enormous valuation by bringing to market any-and-everything or stay true to the brand?
The company chose to grow at all costs, and the results have been dire…
Growth must be handled with care. In the case of Allbirds, the company lost its way and has yet to recover. First Watch, with its aggressive growth plans - that stand in contrast to what is necessary to maintain a luxury or high-end brand positioning - stands at the same crossroad, I think.
Think: when you are able to see a First Watch on every street corner, would you still associate it with exclusivity? Does Million Dollar Bacon still seem worth it?
What would I do?
Raise prices, immediately.
The world is bifurcating into one of the haves and the have-nots. The key is to be proactive about protecting your brand, at all costs (another chapter in our forthcoming book, Moonshot).
The rookie marketing move is to try to be everything to everybody. It’s even more criminal to de-value your brand as a function of competitive forces, not reacting to price changes in the world around you and allowing the market to impose a brand positioning for you.