November was Entrepreneur Month on Rule Breaker Investing, and in this episode, Motley Fool co-founder David Gardner sits down for a conversation with the founder and CEO of the renowned Union Square Hospitality Group, Danny Meyer,
Tune in as Meyer shares the story of his success, his take on hospitality, and his advice for entrepreneurs as they embark on their own ventures.
A full transcript follows the video.
This podcast was recorded on Nov. 16, 2016.
David Gardner: And welcome back to Rule Breaker Investing. It is Entrepreneur Month and we have a very special guest this week. One of my favorite CEOs. His name is Danny Meyer.
Danny oversees the Union Square Hospitality Group of Shake Shack (NYSE:SHAK) fame, among other things. If you're a New Yorker, you almost certainly know Danny Meyer. If you're not in New York [and] haven't heard of the man before, [and] have never enjoyed one of his restaurants, he has a wonderful book called Setting the Table, which is outstanding business advice for entrepreneurs, which is why I wanted to have him on this week's show.
So that's coming up, but we have a little bit of housekeeping to do in advance of that because one year ago, this week, I did one of those things I do every nine or 10 podcasts. I picked some stocks. I picked five stocks and, as I've always said, I like to score myself and I like to hold myself accountable. Come back to you. Let you know how we're doing with those picks. So it's one of those weeks.
And I'm happy to say I'm rubbing my hands together, a little bit here, because this group of stocks has done pretty well. Now, before I share the results, I want to mention the stock market's performance over the last 12 months since 11-11-2015. The S&P 500, the 500 largest companies on the market (what I use to gauge the performance of the overall market, as do many money managers) is up 5.2%, so bear that in mind as I go down these five stocks.
So the date of that podcast was November 11, 2015. The title -- sure, go back and listen to it if you like -- was "5 Lesser-Known Rule Breakers," and I was picking these five stocks for three years, so we're just checking in, here, on the one-year anniversary. The game is not even yet half played. And yet, let's go over what they were and how they've done really quick[ly].
So there were the five stocks: Middleby, MicroStrategy, NetSuite, NuVasive, and Trex. Those were the five picks. I will briefly go over each.
Middleby, the outstanding commercial ovens, etc. company is up 15.5%. MicroStrategy, the big-data, mobile-focused data company is up 13.1%. NetSuite was bought out. In fact, it was announced a few months ago. It just closed out last week, and after the buyout, it closed up 6.3%. NuVasive, the spinal surgery product company up 16.6% and Trex, the outdoor composite decking company was up 68.9%. So all of them were up, with the exception of the one that got bought out by Oracle, by double digits. The stock market, over this time, over the last year is 5.2%. So the average gain of those five stocks, I'm really happy to say, is 24% and the market's average is 5.2%.
Let me make it really clear, before we move on to Danny Meyer, I am not this good. I got five out of five right. I'd never expect that of myself, so please don't overrate me and also be kind to me. Some podcasts hence, when I get one of these wrong, and we go zero for five, I hope you won't give up on Rule Breaker Investing. But this is the second time I've done this and I have to say our results are coming in pretty spectacularly for each of these. And I'm already rubbing my hands about the next group of five stocks, which we'll cover a couple of months hence. So thus much for five lesser-known rule breakers.
His landmark business book, Setting the Table,started this way: "Over the course of the past 21 years, I've opened and operated five white tablecloth restaurants; an urban barbecue joint; a feel-good jazz club; a neo-roadside stand selling frozen custard, burgers, and hot dogs; three modern museum cafés, and an off-premises restaurant-quality catering company. So far," Danny wrote, "I haven't had the experience of closing any of them and I pray I never will."
Danny Meyer is the CEO of Union Square Hospitality Group, which includes Gramercy Tavern, Union Square Cafe, and a number of other award-winning restaurants. In 2004, Union Square launched Shake Shack, which went public in 2015. Danny is incredibly active in the fight against hunger and he is the author of the wonderful book Setting the Table: The Transforming Power of Hospitality in Business. Danny, it's great to talk to you again.
Danny Meyer: Thank you, David, it's great to be here.
Gardner: Have you had to close down anything yet?
Meyer: Yes, and I've learned a good lesson, which is it's not wise to make that the opening paragraph of your book.
Gardner: I honestly did not know.
Meyer: In 31 years we have closed a restaurant, Tabla, which after an amazing 12-plus-year run as an Indian restaurant we did shutter in 2010, and we learned a lot of good lessons from that experience. But it's still a pretty good batting average after all these years.
Gardner: It really is. I did not, at all, intend to launch off and hear about the one failure you've had amid so many successes and it didn't even sound like a failure, anyway. I don't want to start there. Really I want to start with you being born and raised in St. Louis, Missouri. Danny, you grew up in a family that valued great food and hospitality. Tell us how your experience growing up informed today's business philosophy.
Meyer: I think it informed it, more than any other way, due to the just amazingly warm, Midwestern hospitality that I felt everywhere. I didn't know the word "hospitality," except for going to my grandparents for Thanksgiving. I didn't know that it was actually a business principle.
It's a word that doesn't get taught that much in business schools. We hear about the service all the time. But the way that people made you feel growing up in St. Louis, even more than how amazing the food was, [was] I grew up in the '60s and '70s, and this whole country was still not at the point where it had this love affair and almost maniacal focus on food and restaurants the way it is right now. And so what you did focus on -- you went back to the restaurants that loved you the most. You weren't reading about restaurants on the internet. You weren't following celebrity chefs because we didn't have them.
So I kind of felt, when I started my career in New York in 1985, that what the city really needed was a good heart, and it just felt like the city was coming off the nightclub, disco era. Studio 54 [and] The Velvet Rope, which was an ethos that basically said unless you're good enough to get in, we are going to exclude you, and a lot of the restaurants that followed the disco, nightclub era really appropriated that same way of doing business.
And so for a restaurant like Union Square Cafe to come in with a really warm, Midwestern hospitality, but paired with really good cooking (because I spent some time, at that point, in Italy and France) kind of felt like a fresh thing for New York. For me it was the most obvious thing in the world, but it really gave Union Square Cafe, which was my only restaurant for the first 10 years of my career, the opportunity to kind of have that market all to itself for quite a while.
Gardner: I want to get into Union Square Cafe a little bit more in a minute, but let's go back to that word, hospitality. I know it's such a central word. I would say in today's business world -- the lexicon of the business world -- you own the word hospitality, so for any Motley Fool listeners who haven't really thought about it in the Danny Meyer way, Danny would you briefly just define hospitality as you see it? And then if you could give a couple of examples of what your businesses do? And then maybe one or two examples outside of your industry, altogether, where you see hospitality in a way that I would also recognize as a consumer.
Meyer: Sure. I basically came up with the idea that we needed to focus on something beyond service the morning after Union Square Cafe had earned the James Beard Award for Outstanding Service in America. I felt like a fraud. An imposter. Because I had been to restaurants with much better service than Union Square Cafe -- where the waiters were dressed in tuxedos. We were wearing button-down Brooks Brothers shirts where the waiters flambéed your dessert by the side of the table. We were carrying desserts on our arms out of the kitchen. And I just didn't understand what was going on.
And then one year the Zagat survey came out and Union Square Cafe had the 10th best food score, and the 12th best service score, and the 65th best décor score, and yet it was New York's number one favorite restaurant. And I said, I'm not a great mathematician, but (10+12+65) divided by 3 does not equal 1. I said there must be something that Zagat forgot to measure or forgot to ask about.
And that was the first time I ever came to grips with the notion that service is only a way to describe a degree to which you technically delivered on the promise. Whereas, hospitality has nothing to do with the technical delivery of the product, it has everything to do with how you made the recipient of your product feel. It was emotional. It was did you make someone feel like you were on their side?
And hospitality, especially, as I started grappling with this ... this was just about the time the internet had entered our lives ... and what the internet meant more than anything was instant access to more information than any of us had ever had at our fingertips, including the ability to copy things.
So innovation -- coming up with a fresh way of doing something -- stopped being the great advantage that it once had been. If I came up with a great menu idea, or a great wine for the menu at Union Square Cafe in the pre-internet days, I could have a three-year running start before anybody else would figure out what it was or how to cook it. As soon as we got the internet, you didn't even have to take a trip to France to learn about this dish. You didn't even have to know how to read a map or speak the language. You could see a picture of it, you could get the recipe for it, and you would know from word of mouth on social media that it was actually good.
And so what really occurred to me, more than anything, is that everything we did, including service (however we technically delivered the product), was being commoditized, and that put a huge premium on how we made people feel. And so, rather than feeling like an imposter when someone says you've got great service ...
By the way, I'm proud of our service and we work at it hard every single day. I just think that the award should have been for hospitality, because I think that was the thing we were truly excelling at, and I think service and product only gets you about 49% of the way there. I would say that hospitality is worth 51 points if you're trying to get 100 on your test.
Gardner: Such a great and such a subtle point. I mean, the subtleness is demonstrated simply in the way that you have imbued it in your restaurants, and I guess anybody else could have had that thought, too, but few others did. You made it a part of; well, really Union Square Hospitality Group across your properties, and I'm sure there are others learning from you and trying to do it well today. I mean, if you do get copied well, I guess we all benefit as consumers.
Meyer: I think you're being overly generous. I think a lot of great companies figured it out. I think if anything, the gift of Setting the Table, from people who have read the book, has not been that they necessarily learned anything new; but rather they learned good ways to name it and describe it. And once you can name something, then you can teach it, and then you can be intentional about it.
Gardner: So true. In fact, Danny, the one time that I've met you (which was at the Conscious Capitalism Conference a few years ago), I remember the talk that you gave. And in particular, you talked about trying to scale, because once you all of a sudden had more than one restaurant, I remember you saying (I hope I have this right), "I no longer can oversee all my staff, because they're in different places. We have more than one restaurant." And so you were saying, "How can I ensure that even when I'm not there, people get it?"
And you said you began to realize you needed to turn your intuition about what works, about being for people, about being hospitable ... you needed to turn that intuition into intentionality so that it actually became a thing. You gave it a language. You made it something you could teach and coach. Did I get that right and would you still say the same thing today?
Meyer: You got it very right, David, and when I gave that talk several years ago, I was deeply struggling with that very topic. The two questions I would most frequently get asked would be, "How do you guys always manage to hire so many awesome people?"
And that's a reasonably easy question to answer, which is that we focus on the six emotional skills that always are present in a very high level and somebody's got what we call a high hospitality quotient, a high HQ. And those are people who are happiest themselves when they're making someone else feel better. And that has nothing to do with whether they're a good cook or not. That's just how they're wired and motivated.
But the second question was one [that] when I gave that talk I was still really struggling with, which I called the $20 million question because I couldn't answer it. And the question was, "How can you make sure to maintain your culture of hospitality, even as you grow," because the world is littered with businesses that lost the way they do business. They lost their culture. They lost their way.
And I still couldn't answer the question. We were growing Shake Shack at that point and building new restaurants in New York City. And the Shake Shacks were no longer exclusively in New York. And I was very fortunate to work with a fantastic organizational development consultant named Erika Andersen, whose company is called Proteus. She writes a column about leadership for Forbes Magazine.
And Erika said to me one morning over breakfast ... Because I said, "I can't answer this question and I'm worried to death that if we lose our culture, it's like trying to cook recipes with crappy ingredients. It just won't be the same." And she said, "You know, sometimes if you can't answer a question, a non-mathematical question, maybe the question, itself, is flawed."
And she helped me to understand that it was a fool's errand to try to maintain culture. Culture does not want to be maintained, anyway. You shouldn't be worried about maintaining a culture. You should be worried about how to advance your culture and grow it. And so she helped me define the question differently, which was instead of helping you maintain your culture, even as you grow, the question is how [you can] use your growth to advance your culture.
And that was probably the most important moment I've had in the last small handful of years, because what that showed me was that if you can name your culture, and name the family values that you expect from the people on your team to support that culture ... and if you are completely focused on promoting people who are the stars of that culture ... then what happens is that every time you grow, you are actually sending a powerful message to everybody else on the team. The people who get the professional and financial rewards, first and foremost of the growth, are the people who most carry the culture.
Now, that doesn't excuse you from being an awesome performer. We still want to get 100 on our test, but we're not interested in promoting people who get 49 out of 49 points for performance and we make excuses for the fact that they are not culture carriers. Every organization seems to have people that are so good at what they do that everyone kind of looks the other way in terms of how they carry the culture, and we just learned that that's the surest way to hurt your culture as you grow. But the opposite is equally true.
Gardner: So this is Entrepreneur Month at Rule Breaker Investing by entrepreneurs for entrepreneurs. Speaking then to the small businessperson. Maybe you're talking to somebody who's about to open up a restaurant, Danny. I bet you are through this podcast, or you might be talking to somebody who has a tech start-up. So I want you to think across industries, here. What's something that that person should know that you think is underrated about being an entrepreneur? Starting something? And then what's something that you think is overrated that our listeners should maybe look askance at?
Meyer: Boy, that's a tough question. I mean, the greatest thing about a start-up, especially if it's your first start-up, is that nobody's ever heard of you, and so you can actually take more risk, and you need to take more risk. You need to have a real sharp point of view, because if it fails, it's not as if your failure is going to knock down a bunch of other trees in the forest with it.
And I think about the Union Square Cafe, which was the first restaurant I opened when I was 27 years old, and like any other entrepreneur, I think that I was a bit upsided. I couldn't see down. I could only see up. I couldn't see what could possibly go wrong with it. I was so excited about sharing what I loved with other people that it had to be born, and it was. And if it had failed, you and I would never have met each other, and that would have been sad, but I would have gone on to do something else and it just wouldn't have mattered.
You know, you do need to get your ducks in a line. You need to finance the thing properly, because it's not going to hit perfectly from the word go, but I think it's overrated to worry too much about a one, or two, or three-year plan when you're doing a start-up. You've got to find an audience. You've got to get your voice out there. You've got to have a difference. And I think the businesses that tend to be the best at start-ups are businesses that find a unique way to solve problems for people -- sometimes problems that people didn't even know they had or that they weren't thinking about.
So that and think about a comedian. You know Jerry Seinfeld, I think, was the kind of comedian who would weave situations into his jokes that you've experienced in your life, but you never stopped to realize that other people thought those situations were either funny, or frustrating, or infuriating. But by naming those situations, he helped you to be aware of them, and you laughed, because you said, "Oh, my gosh. Other people have that, too."
Well, I think Uber is a great example of a company that said, "Here's a situation we've all been in ... not a funny one ... but we just can't find a taxi anywhere." And they found a way to solve a problem that we may have known we had, but we just didn't even think that there might even be a solution. Well, it doesn't necessarily take a massive solution to nonetheless solve a problem, and sometimes it's the big idea of the business that finds that solution and sometimes there are micro solutions within a business that do that.
So, for example, when we open the new Union Square Cafe, one of the things we're thinking about are [that] there's like three points in a meal that I just don't enjoy. One of them is tipping, so it will open with no tipping. One of them is buying my coat back with a tip. That won't be happening. One of them is waiting for my coat. We're really going to try hard to make that go away. One of them is confirming a reservation and getting a busy signal. We're going to try to make that go away.
Gardner: What about waiting for my meal?
Meyer: Well, hopefully you're waiting long enough so that you know that we actually cook it for you, because we've all had experiences where the food came so quickly that it's suspect.
Meyer: But my advice to anybody with a brand new restaurant is don't go any more than you would drink your favorite wine right out of the barrel. Let them bottle it, first. Let the wine settle down a little bit. I would advise people (and this may be a self-inflicted wound, here) but give a new restaurant a couple of months, because it takes a while for the people who work in it to learn how to use it, and it takes a while for the guests to learn how to use it. But you should not have to wait for your food. After we learn how to break in our baseball glove, I think it will be a pretty good game of catch.
Gardner: That is awesome. When does the new Union Square Cafe open?
Meyer: Union Square Cafe is opening right around Thanksgiving time, and it better, because we're completely sold out for Thanksgiving and I cannot imagine asking somebody to call people and say we were just kidding about Thanksgiving. And you want to talk about the opposite of hospitality. That would be a bad one, so we'll be open. We'll be ready to go.
Gardner: So entrepreneurs, I think we've learned a lot, already, and we're going to run out of time really soon, unfortunately. But thinking about identifying pain points for experiences that we all recognize. Putting a word and a name to that. Identifying in a Seinfeld-like way what everybody was thinking and then solving it ahead of time. You definitely made some headlines with the no-tipping policy, here, in the last 12 months, Danny. How did that come about?
Meyer: It came about, really, for a number of reasons. It's something I've thought about, really, for 20 years, because I just think that it's a crazy system that never should have started in the first place. It was a system that started literally the day after slavery was abolished in America and two different industries (the restaurant industry and the Pullman train car industry) successfully petitioned the government to allow for nonpayment of part of the workers because they proved that they could get their customers to pay those people instead.
And the notion that a tip is actually an indicator or a predictor of the kind of service that you are going to get is also ludicrous, because the implication is that the tipping system prevents bad service, because the waiter or waitress is afraid you're going to stiff them, which is already an adversarial and negative connotation.
But for anyone who's ever had that service, obviously the tipping system didn't prevent it. And then what it encourages is one of two things -- either trying to punish the server with a bad tip, which feels horrible because how do you know that the food took too long because of the waiter? How do you know that wasn't something that happened in the kitchen? Or how do you know that it wasn't because another table was late getting to the restaurant and the kitchen got backed up. So it's a completely false predictor and/or reward or punishment system for service.
And then furthermore, the worst part of it today is that because by law tips are not legally able to be shared with cooks in the kitchen, what it means is that you've created a huge disparity between what a tip-eligible person can make and what a non-eligible person can make. And so we've had, in the 30 years I've been in the restaurant business, about a 250% increase in compensation for tipped employees and about a 25% increase for non-tipped employees.
And that's horrible and it's unconscionable to say in our culture we care for our employees first, but we only care for part of our employees. It would be like if you went to a football game and you paid the offense 10 times as much as you paid the defense, and then you expected halftime to be kumbaya. It's just that people don't feel good.
So we decided to take things into our own hands and get rid of it. And we think we need to do it for the very sustainability of our restaurants in a city where every time menu prices go up (which they do, because real estate continues to go up, health insurance goes up, labor, minimum wage keeps going up). Every time that goes up in a tipping restaurant and you have to tip on top of higher menu prices, the disparity between what a tipped employee and a non-tipped employee just increases.
And so we decided instead of complaining about it, or saying, "Well, that's horrible, but that's just the way it is [and] that's the system," [that regardless of] whoever wrote the rule that we can't address the system, [that we can] correct it ourselves.
Gardner: So from a quick talk about tipping, I want to kind of close it out here, Danny. Put you on the spot, if I may, and ask you for a few tips of a different kind. Thinking already about what you've conveyed to entrepreneurs through this podcast, I'm curious what you haven't gotten to say and maybe one, two, or three tips for entrepreneurs that we haven't already learned from you that we take away from this time together.
Meyer: I think there's three things that are very common to all entrepreneurs. Number one is you shouldn't be doing the things unless the thing, the idea, or the product is something that actually made your own life better, and made your own life where you could imagine it would make your life so much better that you just cannot wait to share your enthusiasm for that product with other people. I think [if] the authenticity of your own passion rings loud and clear to the people using it, chances are you're going to have a big success.
And then the next thing I would say is you've got to be able to look yourself in the mirror and say that it makes you feel great, not just when you're ringing high sales numbers, but when you're seeing people actually using your product and finding that their life got better because of your product. If that brings you joy; that, in and of itself, is like what I call the automobile that the more you drive it, the more it fills itself up with gas.
If you actually derive great pleasure, yourself, from seeing people use your product, then that fuels the next thing which is persistence and perseverance. We're in a day and age where if your idea really is that good, it's going to get copied almost immediately. I travel the country, I travel the world, and I'm looking for ideas all the time. Sometimes I'm the guy copying. Sometimes I'll see a saltshaker in your restaurant and I'll say, "We need that," or I'll see a floral design and I'll send that to our florist. Or I'll see a dessert and I'll send that dessert to one of our pastry chefs.
Now they never do it exactly the same, but I also travel the world and I see people who have completely ripped off logos from our restaurants or fonts, or whatever. So everybody is walking around with a little plagiarist in their pocket, also known as a smartphone, and they're going to use it.
So that's fine, but you've got to find a way to always stay ahead. And it's not a reason to quit coming up with new ideas, but it is a reason that every time you come up with a new idea, you better redouble your commitment to hospitality, because the great thing about hospitality, which is how you make people feel, is that it's the one thing you cannot take a photo of and plagiarize. You can photograph how I cook my chicken, but you can't photograph how the server made you feel when she was delivering it.
Gardner: Such a good point. And you're reminding me of David Allen, who's certainly a friend of the Fool, as well, and I'm going to be interviewing David Allen of Getting Things Done fame next week on the podcast. But one of his lines always comes back to me and I think you said it in so many words: "The better you get, the better you'd better get."
Meyer: Absolutely. That's such a great point. We're all in the expectations game, and I've been to many, many restaurants where the food and the service were fine, and I did not leave disappointed, but if that same level of food and service had been experienced at one of our restaurants, where somebody had come in with higher expectations, I would probably be getting a complaint letter from someone who was very, very disappointed.
And so, on one hand you could say it's a curse to set high expectations, because it forces you to get better, but I'm a big believer that thoroughbred horses run more quickly when you kick them, and nags kind of collapse when you do that. So if you're in this game as an entrepreneur, there's just no reason to do it if you're not motivated by trying to be the best.
Gardner: Such a great point. Closing it out, Danny, you wrote a wonderful letter to your employees post-election. In it you said (I'm going to quote): "We have both a responsibility and a powerful opportunity to lead with our strongest suit -- hospitality." So what's one thing, in closing, that we can all do to bump up our game when it comes to hospitality, whether it's at the workplace or outside the workplace?
Meyer: I would just look at yourself in the mirror and ask yourself why [you were] given two eyes and two ears and just one mouth.
Gardner: A perfect way to close it. He's like my favorite person I've ever known with whom I've spent the least time. Danny Meyer, thank you so much for joining us on the Rule Breaker Investing podcast.
Meyer: Right back at you, David. Thank you.
Gardner: Fool on!
Gardner: Wow! While I have to say I did enjoy my brother Tom an awful lot last week -- and if you didn't get to hear that, I hope you'll take the time to listen to our discussion for entrepreneurs from the two Fool co-founders -- but I have to say Danny, at least, tied Tom. That was a wonderful interview full of insights from somebody, I think, who deserves all of our respect and my admiration. So thank you, Danny.
And here's one thing I'm really going to take away from this, as well. And that is I finally figured out how to pronounce Z-A-G-A-T. So Danny definitely said Za-gatt. Za-gatt. There was even, maybe, a little bit of Midwestern twang to the second "A." Now, I have to say for years (talking about that restaurant guide which was more popular probably pre-internet, but is still a brand out there), I was saying (were you, too?) Zagg-it.
And I said that for years up until I did it in a social circumstance. Maybe it was a cocktail or dinner party. And I was embarrassed by somebody who called me out and said, "David, did you just say Zagg-it? It's not Zagg-it. It's Za-gatt!" And now I'm here to say, since Danny Meyer is the most authoritative person I can think of on this subject, that it's not Za-gott! It's Za-gatt! So from now on, I'm going to say I would encourage you to say, as well, Za-gatt. And if the Zagat family feels like we both got it wrong, let this podcast know.
One other final reflection. At one point Danny talked about hospitality quotient. How he hires for that. He was asked, "How do you hire all the awesome people? How do you find such great people to hire?" A natural question you'd want to ask any entrepreneur of a business that you admire and enjoy. It reminded me of the great Tony Hsieh line, the founder of Zappos. People will tour Zappos' headquarters. They have you in for tours if you want to see Zappos. We've done it at The Motley Fool.
And Tony gets asked, "Tony, all your employees are smiling. I mean, what is with that? What are you doing in the hiring to find such happy people?" And Tony's simple answer is, "We just hire the ones who came in smiling." Well played.
And that's it for Rule Breaker Investing this week. If you haven't already, please subscribe to this podcast on iTunes or Spotify. Here's something I'd appreciate. Give me a review. Throw me some stars. Let us know how we're doing. I really appreciate hearing from you in that way.
Next week, as I mentioned, David Allen of Getting Things Done fame. Maybe you're a GTDer. I am. Or maybe you've never heard of it before. We won't be talking as much about that. We'll be talking about business for entrepreneurs, and how to be more efficient. How to prioritize. How to make the best use of your time. That's my focus with David Allen next week. In the meantime, Fool on!
As always, people on this program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Learn more about Rule Breaker Investing at RBI.Fool.com.