Business model innovation delivers a double whammy

An interesting article in The Times (needs subscription) described how the Amber Taverns chain of pubs has produced recession-busting growth by using business model innovation. Business model innovation is not about coming up with a new "concept" or theme. Its about finding a new and more profitable way of serving a certain group of customers, in this case men who want to have a chat with friends, watch soccer and play pub games.

The Times reports that pubs are closing at a rate of 13 a week, but Amber Taverns has managed to buck this trend, and plans to expand from 70 to 100 pubs in the next two to three years. The net result of Amber's business innovation is that average weekly sales are several times the level at most equivalent pubs.Here's how they've done it.

1. More of what you want, less of what you don't

Business model innovation means stripping out some features altogether to dramatically cut costs without reducing customer relevance. In this case, there is no food. And no food means no kitchens, no chefs, no serving staff. 

Second, it means offering more of what people want. In this case, the beer on sale is cheaper than in a typical pub. The decor is nicer, as each pub taken on by Amber Taverns is re-furbished. There are big screens showing Sky Sports and pub games like pool and darts.

I've visualised Amber Taverns' business model using the value innovation map introduced in the book Blue Ocean Strategy, that I posted on here.

2. Cutting capital costs

Amber has also been clever in how they have build their pub estate. They have bought closed or "distressed" pubs at low prices, but in places with high customer traffic. "We steer clear of country pubs. We want locations with plenty of footfall and plenty of chimney pots.” says Clive Preston, head of private equity group LGV who are majority owners of Amber. Amber then invest two or three times the purchase price on the re-fit described earlier. This means that can create a nice pub without breaking the bank.

3. Share the profits

Amber also have an innovative way of managing the pubs. According to the article, "The pub manager is paid a percentage of the net drink sales, out of which he pays staff wages. Amber is responsible for all the operating costs and supplies the beer".