Threshold Resistance Read online

  Pardon the pun, but dining along the highways of America in the 1940s and 1950s was a crapshoot. That is, until the orange-roofed outposts of Howard Johnson’s popped up all over the country along two-lane highways. A meal at HoJo’s never delighted anybody, although those fried clams were something special. But a family making the trek from Grand Rapids to Cleveland or from Pittsburgh to Miami, could pull into any Howard Johnson’s parking lot with confidence that the restrooms would be reasonably clean and the food would be less than life threatening. Everything was consistent and controlled, from the waitresses’ uniforms to the taste of the HoJo Cola (no Coke or Pepsi sold here).

  America’s first franchise motel company, Holiday Inn, was founded in the early 1950s by Memphis home builder Kemmons Wilson with much the same promise. You never wrote home about the accommodations, but every Holiday Inn met certain standards of cleanliness and service, regardless of its location. Pull in with your weary family after a day of dusty driving, and you knew just what to expect.

  I call this type of consumer promise consistent mediocrity. Don’t underestimate its power, especially at lower price points. Howard Johnson restaurants and Holiday Inn motels had the same underlying appeal that food giants such as McDonald’s, Burger King, and Wendy’s have. Are you passionately drawn to the sandwich you order at Wendy’s, or are you more interested in its competitive price, consistency, and convenience? McDonald’s rarely comes out on top in newspaper surveys of the best burgers in town. America’s quick-serve burger franchises, now doing successful business around the world, are really in the frozen food distribution business. They specialize in serving customers a protein fix in environments of little excitement or delight. But a Quarter Pounder with cheese tastes the same in Baltimore or Beijing. And McDonald’s bathrooms are clean all over the planet—no small feat!

  Consistent mediocrity is the quick-serve franchise’s most important brand promise. And that’s where I saw an opportunity.

  In the 1970s, Max Fisher, the Milstein brothers, Carl Lindner (chairman of Great American Insurance in Cincinnati), and I owned 52 percent of United Brands, the produce giant known for such international food brands as Chiquita Bananas and John Morell Meats. (It was a great investment for us—we bought in at $4.25 per share and sold at $26.) One of our companies was A&W Restaurants, the first franchise food operation in the world. In 1922, two California entrepreneurs named Roy Allen and Frank Wright created a “healthy herb drink” they called root beer. From their first barrel-shaped root beer stand, Allen and Wright introduced distinctive drive-in restaurants and stands along America’s highways. Unlike Howard Johnson’s or McDonald’s, however, the environment of a typical A&W—complete with waitresses on roller skates—was exciting. The company’s frosted mugs of fresh root beer were special.

  United Brands research found that consumers familiar with A&W had far deeper, and more positive, emotional ties to the brand than they did to McDonald’s or any other fast-food franchise. People equated A&W with first dates, graduation celebrations, and memorable family outings. And they loved the taste of the root beer and root beer floats, especially when served in a heavy glass mug right out of the freezer. (Always put the ice cream in the mug first, and then pour in the root beer to avoid overflowing.)

  Unfortunately, A&W had grown out of control. No two of the company’s 2,000 units looked alike. Operators had negotiated their own deals, closing down for the winter months and buying few, if any, supplies through the company’s Santa Monica, California, headquarters. With consumers losing confidence and the brand losing its distinctiveness, United Brands decided in the early 1980s to divest the A&W Restaurants business along with the rights to all on-premises serving of A&W Root Beer. (The bottling and canning rights to the beverage were sold separately.)

  Convinced that the franchise still had plenty of magic, I bought A&W Restaurants from United Brands in 1982 for a relative pittance: $4 million. It was no Irvine Ranch, but the challenge and opportunity really interested me. In the year or so before my acquisition, A&W had begun to test new-concept A&W Great Food Restaurant units, which featured broader menus including salad bars, homemade ice cream, fresh hamburgers (never frozen), and all-beef hot dogs. Several of the prototypes had set up shop in our malls and were flourishing.

  A shopping center’s food offerings are very important. Attractive sit-down or “tablecloth” restaurants hold the customer longer in the mall and increase the number of monthly visits. With such popular national chains as P. F. Chang’s China Bistro, California Pizza Kitchen, Brio Tuscan Grille, and the Cheesecake Factory well represented in today’s better mall properties, it’s hard to believe there was a time when it was nearly impossible to convince good restaurant operators to locate in regional shopping centers. But that certainly was the case. The earliest malls in America stayed open only two evenings a week, following the traditional schedules of their anchor department stores. No restaurant could make it on lunches and afternoon walk-in traffic alone.

  Once again, we went against the grain. From the opening of our very first projects (after overcoming intense community and union opposition), Taubman centers featured extended business hours—10 a.m. to 9 or 10 p.m. Monday through Saturday, and noon to 5 p.m. on Sundays. With great traffic and longer hours, restaurant operators began to take a look. But strict labor laws and union regulations made it difficult for establishments employing more than a few people to make ends meet.

  Largely to overcome these challenges, we developed the very first food court at Southland Mall in Hayward, California, in 1964. World’s Fare, as we called it, featured eight to ten kitchens offering a variety of food choices from Chinese and Italian to burgers and pizza. Tables for all the restaurants were located in a common court policed by mall personnel. Everything was served on china, which was cleaned in a central dishwashing facility. The World’s Fare establishments—smaller operations than typical full-service restaurants—were owned by individual families, thus solving the labor problems and allowing for very economical delivery of good food. Mom and dad, brothers and sisters, aunts and uncles could work morning, noon, and night, without violating any regulations, to keep their businesses prospering. These were some of the most dedicated, hardworking people I have ever met. And the customers loved the opportunity for each member of their family to select a favorite cuisine. Service was fast, the setting was comfortable, and shoppers could resume their shopping relaxed and refreshed.

  The new A&W Great Food Restaurant concept was demonstrating just how appealing an antidote to consistent mediocrity could be. Sales were terrific in our mall-based stores. To help deliver on our fresh food promise, we had a full-time dietitian on staff. With her help we introduced whole wheat buns for our hamburgers (our meat was never frozen in the Great Food restaurant), posted the calorie count for all items on our colorful menu boards, and tested a variety of new offerings, ranging from chili burgers to salads with low-fat dressings.

  In short order we closed about 1,500 of the 2,000 A&W units (that many were underperforming or just doing their own thing) and began building franchise-owned Great Food and traditional restaurants. We reworked the remaining franchise agreements and designed affordable renovation packages to assure more quality and consistency throughout the chain. In a few years, the number of stores climbed back up to around seven hundred. Special attention was paid to our very successful restaurants in the Asia Pacific markets, especially the Philippines and Indonesia. Interestingly, root beer is a taste enjoyed in most parts of the world except Great Britain. There, it seems, the most popular toothpaste brand tastes just like root beer. (That’s a level of threshold resistance not even the most clever marketer could overcome.)

  I took a personal interest in the quality of our hot dogs. I consider myself a connoisseur when it comes to sausage, and hot dogs are in the sausage family of foods. The best sausage in the world, at least in my opinion, is produced in Hungary. So, shortly after acquiring A&W, I visited several Wurstmackers (sausage m
akers) in Budapest to see what I could learn. After they realized I was a good customer, a few of the more friendly wurstmackers shared their secrets. One tip kept coming up in all my conversations: garlic was the critical ingredient. They also agreed that the best all-beef sausage should be made of chuck or shoulder meat, a more flavorful cut that gave the hot dog more texture and bite.

  Armed with the knowledge of the masters, I returned to the United States—Queens, New York, to be specific—to find a manufacturer willing and able to produce the best all-beef hot dog in the world. After much trial and error, we came up with the perfect recipe, full of taste, lower in fat, with just a hint of garlic. Our A&W quarter-pound hot dogs—always steamed first, then rolled on a grill—were a big hit. I would send dozens of them to my friends all over the world. We also sold these delicious hot dogs to country clubs, where they were included on the menu as “steak dogs.”

  You might be wondering if flying off to Budapest to meet with sausage gurus is the best use of an entrepreneur’s time. You bet it is. Your product is all-important. Why should your customer be excited about your business and its offerings if you’re not? Ralph Waldo Emerson famously observed that “there is no strong performance without a little fanaticism in the performer.” Right on. Nothing pleases me more than to learn that a customer and his or her family have had a great experience in one of our malls. It doesn’t matter if you are selling a $40,000 automobile or a $2 hot dog. Customers know if they are receiving value, and they will reward you with their loyalty whenever they do so. And once we got the hot dog perfected, I knew people would find special value and enjoyment in a visit to A&W Restaurants.

  Of course, not all my creative efforts to redefine and reenergize A&W were successful. In fact, one experience in particular still leaves a very bad taste in my mouth. We were aggressively marketing a one-third-pound hamburger for the same price as a McDonald’s Quarter Pounder. But despite our best efforts, including first-rate TV and radio promotional spots, they just weren’t selling. Perplexed, we called in the renowned market research firm Yankelovich, Skelly, and White to conduct focus groups and competitive taste tests.

  Well, it turned out that customers preferred the taste of our fresh beef over traditional fast-food hockey pucks. Hands down, we had a better product. But there was a serious problem. More than half of the participants in the Yankelovich focus groups questioned the price of our burger. “Why,” they asked, “should we pay the same amount for a third of a pound of meat as we do for a quarter-pound of meat at McDonald’s? You’re overcharging us.” Honestly. People thought a third of a pound was less than a quarter of a pound. After all, three is less than four!

  We tried a half-pound burger (two patties to the pound) for just ten cents more than a Quarter Pounder. That wasn’t a big hit either.

  Needless to say, I was depressed by this experience, enough so, that I started to get more involved in K–12 education, teacher training, and public school reform. There is an important lesson to be learned from all this. Sometimes the messages we send to our customers through marketing and sales information are not as clear and compelling as we think they are. A product benefit you value may not be high on the list of the consumer’s needs. Research is worth the cost, especially if you are investing millions of dollars in an advertising campaign that could confuse more than convince. The customer is always right, even if he or she never mastered fractions!

  We also came to another important conclusion. While working hard to differentiate A&W Restaurants from the frozen-food emporiums like McDonald’s, it didn’t help to focus our marketing on a direct comparison with these competitors. That just reinforced the notion that we were one of them. By naming our product a “third-pounder,” we framed our offering within the context of the powerful McDonald’s Quarter Pounder. That diminished the more important messages of fresh beef, healthy menu choices, and frosted mugs of the best root beer in the world.

  When we found the right buyer, in 1994, we sold A&W Restaurants for nearly $20 million. We had righted the ship, rekindled the magic, developed a terrific food tenant for our centers, and created a franchise organization equipped to nurture a venerable brand. The only thing I regret is that I didn’t buy the bottling and canning rights to A&W Root Beer. United Brands offered them to me for around $35 million at the time I acquired the restaurants. A few years later they were sold to a Texas venture capital company for $135 million. Of course, at the time, I didn’t see how the root beer would help my shopping center business. The restaurants could and did.

  But from this experience I can attest that restaurateurs really do have to live over the store. With an increasing array of investment interests to watch over, I left it to others to get the garlic just right.

  EIGHT

  Minding the Store

  In the early 1980s, our two malls in the Washington, D.C., area—Lakeforest in Gaithersburg, Maryland, and Fair Oaks in Fairfax, Virginia—were anchored by Woodward & Lothrop department stores. Woodies, as it was affectionately called, was the strongest regional department store chain with the best locations in arguably the best retail market in the country. Since its founding, in 1873, by Samuel Walter Woodward and Alvin Mason Lothrop, Woodies had earned its reputation as the most trusted retailer in the nation’s capital.

  Now, for as long as I can remember, critics have described department stores like Woodies as dinosaurs. Going back to the 1950s, it has been hard to find a vocal champion of this much-maligned institution. The same cocktail party philosophers who express knee-jerk disdain for suburbs, malls, and developers, universally rail against department stores—usually while dressed from head to toe in evening apparel purchased at one of the emporiums they slander.

  To be sure, many department store chains have deserved the fate of the dinosaurs. But it’s too easy to dismiss the contributions and continuing relevance of what I believe was the most important retailing institution of the twentieth century. Every good retailer understands that the customer, God love her, lacks confidence. (Again, please excuse the “her.” I am just reflecting the fact that the vast majority of mall and department store customers are women. And for the record, male customers lack confidence, too.) While this inherent insecurity contributes to threshold resistance, it also presents the good retailer with a golden opportunity. By earning the trust and confidence of your shoppers—through product knowledge, service, taste level, and consistency—you can win a customer’s loyalty for life. Purchasing a dress or a pair of shoes is a far more enjoyable experience if you are guided and supported in your decisions by a professional, courteous salesperson who wants to help you look your best. And it’s even better if the store in which you are buying the apparel stands for something important to you and meshes with your self-image.

  In other words, a clearly defined brand bolsters a customer’s confidence. So does a good salesperson. And no selling institution or product distribution system in history has combined the power of branding and salesmanship better than the department store. Pioneering American department store merchants like Marshall Field and John Wanamaker, as previously noted, used mass production and product standardization to offer customers unprecedented levels of selection and value. They also built sufficient critical mass into their organizations to create buying power (holding prices down) and promotional impact. Urban newspaper readers learned about sales at downtown department stores every day. Seasonal sales and special events drew people into town from far and wide. Artfully designed store windows featured the fashions of the day and set styles for everyone to follow. Colorful shopping bags adorned with department store logos were seen in the hands of beautiful people all over town.

  I thought I knew something about department stores. I served on the board of Macy’s from 1986 to 1995. I also helped create a national platform—the regional mall—where department stores competed with agile specialty stores. And I believed Woodies had some competitive advantages in its excellent Washington home market.

  After al
l, through the ups and downs of the economy, our federal government keeps cranking, supporting a well-paid, stable workforce in which women are well represented. Elections every two years create positive population turnover. The working women of Washington (coming to D.C. from cities all over America) were eager to fit in with the city’s distinctive sartorial style. They trusted Woodward & Lothrop to outfit them with just the right professional, casual, and special occasion wardrobe.

  The chairman of Woodies at the time was a highly respected merchant and businessman named Edwin Hoffman. Working through the Lakeforest and Fair Oaks deals, Ed and I had become good friends. We spent enough time on golf courses together (Ed belonged to several of the best country clubs on the East Coast) and at a few University of Michigan football games to really understand and trust each other. After decades of dedicated but sleepy management by members of the Woodward and Lothrop families, Ed had clearly kicked some new life into Woodies, then the nation’s largest independent publicly traded department store chain. In 1983, sales in Woodies’ seventeen Washington-area stores exceeded $400 million, and net earnings were $15 million, or $4.17 per share.

  With all that success, it surprised me when Ed seemed so distracted at a New Year’s Eve party at my home in Palm Beach in 1983. Toward the end of the evening, he mentioned that he had received a disturbing proposal from an aggressive and always ungracious New York investment advisor named Ronald S. Baron. Baron had called Hoffman to suggest a leveraged buyout of the company at a price 50 percent higher than the stock’s current trading levels. Claiming to represent around 18 percent of the shareholders, Baron told Ed that he had already begun to line up bank support for a $300 million loan to complete the deal. Concerned that Baron’s unsolicited activity would put the company in play, Ed asked if I would be interested in lending a hand if things got difficult. I assured him that I would do anything I could to help. The strength of Woodward & Lothrop was critical to the success of our Washington-area properties, which were performing very well. The last thing Woodies needed was an unwelcome distraction. Since the midseventies, Bloomingdale’s, I. Magnin, and Neiman Marcus had come to town with strong competition for the hearts and wallets of the sophisticated D.C. shopper. Ed Hoffman knew he had to mind the store.