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The restaurant industry’s path dependence problem

4 min read

Restaurant and Foodservice

On one of too-many-to-count recent cross country flights, I had the pleasure of reading entrepreneur/venture capitalist Peter Thiel’s great new book “Zero to One“. Among many topics of interest, I found his discussion of “path dependence” interesting and important for the restaurant industry to consider. Path dependence refers to the economic concept that our set of decisions in current time may be constrained by the decisions that we’ve made in the past. In other words, we’re following a pre-determined path that makes it impossible or at least difficult to take the proverbial less-beaten path. In reading Thiel’s discussion of path dependence, I thought about the problem of path dependence in the restaurant industry.

The decisions facing restaurant executives today are limited by decisions of the past. Take the area in which my company works the most: technology. I’ve yet to meet a restaurant IT executive who is thrilled with the technology landscape that he/she has inherited from his/her predecessor. This frustration is not simply due to the maintenance of the inherited systems; that comes with the territory. It’s more often than not due to the fact that the technology platform being used in the restaurants and at headquarters limits the new technologies that the IT executive can deploy.

In fact, lack of technology flexibility and closed — not open — technology platforms appear to be endemic in hospitality technology. Unlike the broader technology landscape, which has moved from a closed/walled world into one that is more open and interoperable, hospitality technology platforms seem to have become more closed in recent years, the technical architecture perhaps mirroring the street fighter mentality of hospitality technology sales teams: taught to protect one’s turf in a zero sum, winner-takes-all game. The largest companies in the space — despite none of them hold anything close to a true monopoly position in the market — act like monopolists to whom IT executives must bow down.

Sadly, I see many IT executives of today making the same kinds of commitments to these closed/closed-minded hospitality technology vendors that their IT executive predecessors did. And that guarantees that their IT executive successors will suffer their same fate of path dependence. Is this path dependence of path dependence decision-making itself? Perhaps the problem is the way IT executives think and the way restaurant organizations empower that decision making with dollars in the annual budgeting process.

As Thiel suggests, and I’ll echo here, part of the problem is short-term thinking. Restaurant executives think in one to two-year timeframes and rarely consider long-term consequences. Point-of-sale (POS) decision making comes up every five years, as operators depreciate their POS hardware investments over that same time period. Short-term considerations like price oftentimes trump long-term considerations like flexibility and interoperability. That’s a shame.

While I’m focusing on IT path dependence, the same rule applies (though perhaps to a lesser extent) with real estate and operations. That is, the real estate decisions that a brand makes today will limit its real estate options in the future and the operations decisions that a brand makes will limit its operations options in the future. In these areas, as in IT, annual budgeting and short executive tenures seems to all but ensure short-term thinking and incremental progress that so often falls short of the larger, significant transitions that must take place.
The restaurant industry will only be able to truly innovate if it can break out of its old way of doing things and take the less beaten path. That will take courage, leadership, and long-term thinking by those in power. Let’s think about long-term trends and not just short-term convenience. Let’s insist upon open, interoperable, and modular systems that keep our future flexible and give us the widest future path possible. Let’s sniff out the hidden agendas hiding behind low prices and freebies and do what’s right for our brands in the long-term, not just what’s lower cost today. Let’s set the tables for our successors in the way we wish our predecessors would have had the foresight to set it for us. Let that be our generation’s legacy.

Noah Glass is the Founder & CEO of Olo. Since 2005, Olo has helped restaurant brands increase revenue per square foot by delivering faster, more accurate, and more personal service through digital ordering. Today, over 8 million consumers use the Olo platform to order ahead and Skip the Line® at the restaurants they love.


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