Offering free products is a marketing tactic that has been used by businesses big and small ever since there have been businesses big and small. But these tactics certainly have their risks, as the owners of a restaurant in China recently found out.

For the equivalent of only 120 yuan ($19) per month, customers at Jiamener restaurant Chengdu, Sichuan province - a city that boasts more than 14 million residents - were able to eat as much as they wanted for as long as they wanted. The promotion was a hit. In only 10 days, more than 1,700 people signed up for the deal. Unfortunately, the restaurant's owners got a lot more than they asked for.

Less than two weeks after starting the campaign, the restaurant was out of business and more than $78,000 in debt. The reason isn't surprising. During that period the restaurant fed more than 500 customers a day - many who shared their "membership cards" with friends and family who then also lined up outside (and then lingered inside) from early morning until late at night. Workers at the restaurant pulled ten hour shifts and the eatery's owners only managed a few hours of sleep. Not fun. Not profitable.

"We knew we would be losing money [by launching the discount promotion]," one of the owners was quoted as saying to the Chengdu Economic Daily and reported in the South China Morning Post. "We wanted to accumulate more loyal clients through this strategy." The owners strategized that the additional customer volume would enable them to purchase beer and alcohol at reduced prices which would then offset the cost of the food they were essentially giving away.

All-you-can-eat restaurants are not new. Big chains and hotels in the U.S., from Golden Corral to Pizza Hut to Red Lobster to the higher end buffet spreads in Las Vegas all have similar models to what Jiamener offered. So why did this little restaurant's all-you-can-eat promotion fail?

For starters, jumping into the "all-you-can-eat" world takes a lot of experience. Take a walk into one of those family style buffet restaurants in the U.S. and you'll be subject to the tricks of the trade learned over many decades.

Carbs and starches, breads and other filling foods, along with less expensive salads, are presented to customers first and foremost before everything else to fill up their bellies. Food choices not only lean towards much less expensive options (pizza and pasta over steak) but - let's face it - aren't exactly made up of the finest quality ingredients. Drinks are aggressively peddled. All of these places are designed to fill you up with cheaper stuff and get you ordering higher margin products that are not included in the all-you-can eat deal. And most of it is self-served to cut down on employment costs. I'm betting these tactics were lost on the new owners of Jiamener.

I'm also betting those same owners didn't really test out their financial model as much as they should have. Like any start-up, the numbers need to be conservative, tested and questioned. Were the assumptions too aggressive? Did they consider worst case scenarios (like diners giving their membership cards to their entire families?). Did they run their numbers by outside advisors like an accountant or lawyer? Were their estimates too rosy? Too optimistic? Seems so.

Finally, giving away free stuff like this is oftentimes best left to the big boys. Volume and scale is everything, particularly when you're operating a low margin business like a restaurant. I'm not sure a single Fogo de Chão restaurant could be profitable on its own. But a chain of all-you-can-eat Brazilian meat restaurants where everything from purchases to employee contracts to kitchen equipment that can be negotiated at volume levels and a regimented order of cooking, serving, delivering and cleaning can be implemented across many locations? That's where a restaurant can generate profits. When you're big you can afford to give away free stuff. When you're very small, like Jiamener, you're taking a big risk and need to be very, very careful.

Unfortunately, Jiamener's owners made one last, fatal flaw: they bet the farm on their idea. Now the farm, along with everything else - is gone.

I'll give them credit for one thing though - they didn't lay the blame on anyone else but themselves. "The uncivilized behavior of the diners was secondary," one of the owners admitted. The main problem was our poor management."


Published on: Jun 20, 2018