Alternate Business Models that Drive Retail Brand Value

On the surface, the idea of sacrificing fourteen percent, or one-seventh, of a retail store’s potential selling hours seems absurd enough. To do so on a day of the week when most consumers have a day off seems to be even more damaging for the prospects of a retail business. Customers want to purchase goods and services at times that are convenient for them. Many business models revolve around catering to the consumer and this often includes long hours particularly on weekends.

I am familiar with a number of businesses that are closed on Sunday, including two examples that are extremely successful: R.C. Willey [Berkshire Hathaway (BRK.A)] and Chick-fil-A. What is most interesting about both businesses is the fact that they appear to use their Sunday policy as a competitive strength rather than an impediment that must be remedied. Behind the success of both businesses are important psychological tendencies that, over a long period of time, have expanded competitive moats.

Let’s take a brief look at the characteristics of each business and then try to draw some lessons from their success despite a policy of remaining closed on an important day of the week.

R.C. Willey

R.C. Willey was the subject of a book review on The Rational Walk last week. The company has a 75 year history originating in a small community near Salt Lake City, Utah. Over the past fifty years, the company has expanded from a single location in Utah to thirteen stores in four Western states. The company’s Mormon founder instituted the Sunday policy and subsequent managers have kept this tradition over the years. The company’s success in Nevada and California shows that the business model works well even outside the heavily Mormon population centers of Utah. The growth of the company in terms of sales and profits leaves little doubt of the presence of a formidable economic moat.

Chick-fil-A

Chick-fil-A was founded in 1946 by Truett Cathy when he opened a restaurant named Dwarf House in a suburb of Atlanta. He put in place a Sunday closure policy immediately both because of his Baptist faith and due to a belief that employees would better serve customers if they can be certain that Sundays would be free for family and church activities. Today, the fast food chain has over 1,300 locations in 37 states including areas outside the South. The company has developed a loyal following with many fanatic customers who camp out overnight when a new store opens in order to win free meals for a year. The presence of an economic moat cannot be denied.

Supported Only by Religious Customers?

The most common explanation for the success of businesses with a Sunday closure policy is that they must be supported primarily by customers with religious convictions who appreciate the message sent by the business. This argument is basically using the concept of social proof to explain the success of the business model.

While there is little doubt that a certain proportion of customers of Chick-fil-A and R.C. Willey support those businesses for religious reasons, it seems doubtful that each company could have grown so rapidly with what can be viewed as a niche strategy. Furthermore, the expansion of each business into areas that have a lower concentration of very religious people seems to contradict the idea that social proof alone can account for success.

Obviously, there are other factors at work here. Each business offers customers competitively priced quality merchandise and, without this, it is highly doubtful that religious customers would remain loyal. After all, if the underlying value is not there, few customers of any religious persuasion have the luxury of making sub-optimal economic choices particularly in difficult economic times.

Scarcity

While providing quality goods and services at competitive prices is the prerequisite for success in nearly all retail businesses, I believe that other important psychological factors help to account for the success of businesses with a Sunday closure policy.

When goods and services are available 24 hours a day, as is the case with many businesses today, customers know that they can make a decision to go to the store at any time. In contrast, when a retail store is closed on Sunday and when the merchandise offered is superior in quality and/or price, the closure creates an aura of scarcity. Customers know that they cannot just hop in the car on Sunday and get a Chick-fil-A sandwich.

This may seem silly. A customer can just hop in the car and go to KFC or McDonalds (MCD). While this is true, the perceived quality and scarcity factor may simply shift consumption of Chicken sandwiches to Saturday or to other days of the week rather than result in incremental business for competing fast food chains.

In the case of R.C. Willey, the situation is not that different. Customers know that there will be a “scarcity” of the prices offered by R.C. Willey unless they shop on Saturday or during the week rather than on Sunday. This likely has the effect of simply shifting customers to other days of the week rather than shifting business to competitors.

Not For Everyone!

While the Sunday closure advantages of Chick-fil-A and R.C. Willey are hard to deny based on their demonstrated track records over many decades, it is far from clear than other businesses can implement similar policies. An established business that has always been open on Sunday may appear opportunistic and insincere if they suddenly decide to implement a Sunday closure policy. It appears that this type of policy has to be deeply ingrained in a company’s culture almost from the beginning to create the desired effect. Therefore, even if the Sunday closure advantage is compelling, it may not be a policy existing businesses can leverage.

Disclosure: The author owns shares of Berkshire Hathaway. R.C. Willey is a subsidiary of Berkshire Hathaway.

Comments

[Ravi Nagarajan:]

All: Just to clarify the headline which may be confusing, R.C. Willey is a subsidiary of Berkshire Hathaway. Of course, Chick-fil-A is a privately held independent company not affiliated with Berkshire Hathaway. Both, however, were good examples of the point of the article which really had more to do with looking carefully at business models that, at first glance, appear sub-optimal but may actually be driving brand value.

-Ravi Nagarjaan

Nov 02 07:49 AM

[SA Editor J...:]

The title of this article has been changed to better reflect its subject matter. We apologize for the confusion.

Nov 02 08:14 AM

[Comissar:]

I'm not convinced that the Sunday closing policy has anything to do with the success of either company, or that Sunday closure really represents a significant 'business model' component of it's own.

In R.C. Wiley's case, it's not obvious to me that there is an economic moat at all (what's the barrier to entry?), just a competent business that has done enough other things right to offset the impact that Sunday sales might otherwise have had. I've never been in an R.C. Wiley store, just perused their web site, so this is just conjecture on my part.

In the case of Chic-fil-A, there are two other factors. One, it is not a 'me too' restaurant; a few of their food offerings may overlap slightly with some other chains, but most are quite a bit different than either McDonald's, KFC or the like. No other chain focuses on the chicken sandwich in the way that Chic-fil-A does, so there isn't really an apples-to-apples store comparison available (but also not much of a barrier to entry). Besides, the scarcity concept does not apply. In fast food, people want food now - they don't plan fast food purchases ahead of time, and aren't going to not eat on Sunday, they will just eat somewhere else. No fast food restaurant has an absolutely dedicated following; we all keep rotating through our favorite stores based on our mood, where we are in our daily business and errands, and where we haven't eaten recently. They aren't like more expensive, 'special occasion' restaurants that we might actually plan ahead for.

Second, many of their earlier stores and growth came from shopping malls, not street locations, where traffic patterns are much different - few people 'jumps in the car' to go to a restaurant in a mall food court, and mall traffic for many years was not as strong on Sunday, with shorter business days or not being open at all. That's less of an issue now at malls and not at all at freestanding stores, but we're talking about how they got where they are today.

This looks to me like an explanation to fit the results, not really borne by any facts. I believe that in both cases, Sunday closure is a minor issue, one that may have fit the founder's personal convictions and helped their image in the early days with some, but also under circumstances and with clientele where it didn't affect business much either way. Sunday closure is probably a minor net loss today, but is covered by the businesses other successful characteristics. After all, few businesses (even very successful ones) have absolutely every factor optimized perfectly, and while both of these companies appear to be successful, neither are exactly giants in their field (or have even become nationwide businesses).

There is no way to know, but my bet would be that a policy change at either company would slightly improve, not hurt, their business today.

Stan Ward

Nov 02 11:20 AM

[Ravi Nagarajan:]

I am more personally familiar with Chick-fil-A than R.C. Willey from a customer perspective, and with the business results of R.C. Willey from my perspective as a Berkshire shareholder. I can say without question that Chick-fil-A does have a loyal following - in many cases, people who would not think of going to another fast food restaurant if they can possibly avoid it. To the extent that people do not eat fast food every day, it is easy enough to shift consumption from Sunday to another day of the week. I've done this myself many times.

Chick-fil-A has the fanatical type of customer base that just screams "moat". Drive by a stand alone location sometime around lunch and look at the drive thru window and compare it to the nearest KFC or MCD location. Name another fast food restaurant that can get customers to camp outside for 12 hours at a store grand opening to get free sandwiches. The only comparable chain is In-N-Out burger on the west coast.

R.C. Willey competes mainly on price but also on service and the integrity of the business practices followed by management. In terms of market share and profitability, they seem to be doing quite a bit well and for some reason, they keep killing the competition (particularly in Utah).

The Sunday closure policy is not the source of the competitive advantage, nor is it even the most important aspect of the business model. But I would argue that it certainly does not hurt either business and could possibly help drive interest and sales for the reasons mentioned above.

Nov 02 12:29 PM

[RogerScott:]

Closing on Sunday is an indication that the manager/owner has values other than greed which is appreciated by non Christians and Christians. Also, employees appreciate knowing that one day will always be a no work day. This is bound to have a marginal effect on employee quality.

Nov 02 02:21 PM

[najdorf:]

Also remember that its tempting to juice same-store sales by opening for more hours or adding loss-leaders to the menu - lots of companies compensate based on SSS and lots of analysts look at it, but really we should be looking at whether growing same-store sales are leading to sustainable profit growth. What's the cost of turning the lights on and paying employees for another hour compared to the new sales created? What's the cost in management time spent pushing more hours and more products rather than focusing on profitable core business?

Nov 03 11:37 AM

[Comissar:]

This article was thought provoking. It's surprising to me how many different issues come up when discussing Sunday sales. All
of the above are valid comments, and bring up a few new thoughts.

On the issue of employee days off, many fast food and retail workers are not traditional 40 hour a week wage earners. For some working weekends, they have a "day" job, or are going to school during the week. Speaking as the father of both a high school and a college student that work in these types of businesses, Sunday business represents an important opportunity for them to get more hours in the week. But I totally agree that people need the ability to have Sunday off if they choose.

I don't agree that Sunday sales simply represent greed on the part of management. The fact that so much business is done on Sunday indicates that there is a real public demand being satisfied, as well as a worker benefit. Coupled with improved utilization of fixed assets for shareholders (which far exceeds the cost of having the lights on another day), it's a reasonable choice for some businesses that benefits many.

As far as SSS vs. profits go, I can comment based upon my past ownership of a Subway sandwich franchise. At that time, material (food) costs represented about 1/3rd of register gross, payroll was another 1/3rd, and everything else (mostly fixed costs, but including Subway's cut and profits) came out of what was left. That meant that we could have fairly minor incremental sales during additional hours open and still come out ahead over being closed, and we never were short of volunteers to work those hours. Obviously, this isn't true for all businesses.

Nov 13 01:23 PM