The $14 Croissant Problem

I saw a $14 turkey and cheese croissant in the wild this weekend.

I felt the question was coming... my friend turned to me and asked ‘how in the world are restaurants not rolling in cash?’

I usually respond with something like 'high fixed costs, rising variable costs, and perishable goods that can’t be scaled.'

All very true, but it also boils down to restaurants being in a highly competitive industry, putting a ceiling on how much you can charge customers.

Here are the underlying constraints:

Threats of new entrants: High (D)

Very easy for anyone to open up a restaurant.

Threat of substitutes: Very High (F)

Competes with groceries, convenience stores. Pricier than eating at home, so especially vulnerable during inflationary periods.

Competitive rivalry: Very High (F)

Immense competition across dayparts, cuisines, geographies. Geography is less of a moat now with the rise of delivery.

Buyer power: High (D)

Low customer switching costs to other options, and only getting easier with 3rd party apps.

Supplier power: Medium-High (C-)

Food (most leverage), labor, delivery platforms, insurance, rent, software, and utilities (least leverage) all push down margins.

Overall: D

This gets us to just above failing, which feels on point! There’s no silver bullet here, but the restaurants that beat the odds do things differently. They typically:

• Execute well with a complex product, making it as difficult as possible for competitors to copy their offering at scale.

• Narrow their competitive set so they have the right to win specific dayparts, demographics, occasions, cuisines.

• Control costs relentlessly. Food can represent up to ~30% of sales, so even two points of margin here provides pricing flexibility.

We ended up grabbing a bagel sandwich next door for $6.50.

The cafe behind the $14 croissant probably knows exactly who they’re competing against, but my read is that costs aren’t fully under control. And when costs aren’t under control, it’s incredibly hard to compete.

At Tarragon, we’re giving operators the power to compete by owning the cost side of the equation.