Lane Cardwell

Can There Be Too Much Quality?

Silly question, right? Isn't that like asking if you can be too healthy, too rich, or too good-looking? I have been asking this question of people lately about restaurants and have been getting the expected answer. People can't conceive of a situation where a restaurant can have too much quality. It's the follow-on question that brings people back to reality:

      "How much more would you be willing to pay for more quality?" 
      "Whoa, you didn't say anything about it costing me money. I was just telling you that
        I appreciated more quality."

And that's the rub. In the words of economist Milton Friedman, "There is no such thing as a free lunch."

Probably the easiest way to put this question into context is to use the analogy of a house in a modest neighborhood of similarly sized and priced houses. One family inherits a good sum of money and decides to remodel and upgrade the home in which they have lived for many years. The put in granite countertops, a Viking range, a Sub-Zero refrigerator, cherry wood kitchen cabinets, replace the carpet with wood plank flooring, completely redo all the bathrooms, update all of the lighting, redo the landscaping, and so on.

The finished home is a beauty. One day they decide to put the home on the market and move to another city. The realtor gives them the bad news. In spite of all of the upgrades that they have invested in, homes in their neighborhood only sell for a certain price range per square foot. Their home will command a price in the upper range, but will not come close to selling for what they have invested in it. They will have to consider the extra money that they will not recoup from the sale as an investment in their egos.

Restaurants, especially chain restaurants, exist in "neighborhoods" where their customers are willing to only pay a certain price range for menu items, no matter how good the quality. Let's consider steaks for example. A restaurant like Outback is expected to serve USDA Choice steaks, and they do. They cost more than the USDA Select steaks that many non-steak casual dining restaurants have gravitated to. A steakhouse would be expected to carry a higher quality steak because that is their main focus, and a customer would hopefully appreciate the quality enough to pay for the extra cost.

Some steak chains, like the Landry's-owned Saltgrass Steak House, use an even higher quality of steak designated as Certified Angus Beef. Only 8% of beef is rated as Certified Angus, while 54% of beef qualifies as Choice. Naturally it costs the restaurant more, therefore it costs the customer more.

Is the extra price for a better steak in a steakhouse worth it? Now we have arrived at the question at the beginning of the blog. Everything relating to quality exists in the context of the positioning of the restaurant (it's neighborhood) and the price being charged. Saltgrass competes against other casual dining steak chains and can only command a slight premium for better quality. The customer will determine whether they can tell the difference in quality, and whether it is worth the extra money being charged.

As an historical note, several years ago Outback tried offering some cuts of USDA Prime steaks in some of their restaurants. They charged prices far below those of the Prime steakhouses, but far above the prices they charged for their Choice steaks. While a good value, it was too much quality for the neighborhood and they discontinued it.

Quality is a funny thing. It is always relative to the concept and the competition and the price that is charged. The battle ground is always for better quality. The real issue is whether can you do it for the same price, or not much more. Don't forget the neighborhood that you live in.

Speaking of Milton Friedman, my favorite quote from him seems appropriate these days. "If you put the federal government in charge of the Sahara Desert, in 5 years there'd be a shortage of sand."

Posted by Lane Cardwell on January 30, 2009 | Comments (2)