Food Trucks = Business Model Innovation

By Steve | SmallBizLabs.com

The gourmet food truck craze sweeping the nation is a classic example of business model innovation.

And the response from brick and mortar restaurants is a classic example of how incumbent industry participants tend to respond – by using their political power to try and fend off the innovative new firms.

Business model innovation refers to taking a new approach to an existing business or industry. Targeting new customers, changing what is offered, or redefining how an offering is provided are all examples of business model innovation.  (see HBR’s Reinventing Your Business Model for a more detailed description).

Gourmet food trucks are using a variety of new business model approaches. The main one is the use of a low cost, flexible and agile delivery platform – the truck.  But there are others, including:

  • a focus on high quality food at value prices
  • alternative, unique and fast changing menu items
  • social media to connect and communicate with customers
  • a value proposition that includes fun and new experiences

Industry incumbents often struggle to respond to competitors using innovative business models. Harvard Business School professor Clayton Christensen coined the term The Innovator’s Dilemma to descibe this issue.  The problem is incumbents are often locked into their existing approach to doing business, especially if they’ve been successful.

One way incumbents can and do respond is via the political process. Industry incumbents tend to have the resources and expertise to influence policymakers and regulators against the disruption of their business model. 

This is currently happening as brick and mortar restaurants realize food trucks aren’t a fad, but potentially serious competition. Recent legal proceedings in San Francisco and food truck regulation hearings in Chicago illustrate the legal, political and regulatory battles taking place in many cities across the country.

In most of these proceedings, brick and mortar restaurant owners are claiming that food trucks compete unfairly because they don’t pay rent, property taxes and other expenses associated with traditional commercial space.  In other words, they are saying it’s unfair that food trucks are using a different business model than they are.

It seems obvious to me this is not a good argument.

More relevant and supportable is the view by restaurant owners that food trucks are subsidized by free-riding on public property — the street — as their place of business.  Here I think they have a point.

It will be interesting to see how this plays out.  Brick and mortar restaurants have a powerful card to play – they pay a lot more local taxes than food trucks do.  During these times of fiscal stress, few local governments aren’t going to be influenced by this.

Many other industries have tried to use political processes to fight off business model innovators. Few have succeeded.

Examples of failing to stop business model innovators via the political process include the U.S. auto industry versus Japanese automakers, traditional airlines versus low cost airlines, booksellers versus Amazon – I can go on with examples for a long time.

The real question is whether or not food trucks offer a better solution to their customers.  If they do, they likely will eventually overcome political roadblocks and win in the marketplace.  Based on our research, we think in many cases they do offer a better solution.

Another interesting question is whether or not food trucks are an example of disruptive innovation – which are innovations that rewrite an industry’s rules and/or overturn widely accepted industry practices.

Disruptive innovation is rare, but because it changes industry landscapes, it’s very visible. There are many famous examples of disruptive business model innovation – Southwest Airlines, Dell Computer, Charles Schwab, Nucor Steel, Amazon and Google all used business model innovation to change an industry.

Disruptive innovation often starts through low cost offerings to underserved markets, and then moving up market to higher value customers.  The shift from roach coaches to gourment food trucks fits this paradigm.

But we don’t think food trucks will disrupt the entire restaurant industry. Their offerings are too limited.

They could, however, be disruptive to quick service and fast food restaurants, as well as take-away food providers.  We’ll have more on this topic in the near future.

One thing we’ve consistently found in our research is that small businesses are natural innovators.  Food trucks are another example.

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Posted by on Jul 31 2012. Filed under Food Truck Courts, Latest News. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

1 Comment for “Food Trucks = Business Model Innovation”

  1. rperhamus

    Great article, but I would like to point out that 2 statements that may be misleading. I’ll illustrate how food trucks can pay actually pay more than double to a city from parking fees and sales taxes.

    “Food trucks are subsidized by free-riding on public property — the street — as their place of business. Here I think they have a point.” and I don’t.

    Often, trucks do pay for the use of “public property” through parking fees, which restaurants do not pay. These added fees bring money directly to a city. For example, a $15/day parking pass generates $5475 for 365 days of use, that go directly to the city where the food is sold. Restaurants don’t typically pay this extra $5475 parking fee to a city. Is it significant? Yes, for example, in California, 1% of the sales tax goes to the city where the business is located. BOE records show a city with 190 restaurants reporting an average of $490,000 in taxable revenues per year, or, $4,900(1%) goes to the city coffers. The $5475 parking fee is in addition to and greater than the $4900 in sales tax revenues that restaurants pay to a city.

    “Restaurants pay a lot more local taxes than food trucks do” I disagree.

    For example, in the state of California, all retailers including restaurants and mobile food facilities report their taxable sales and pay taxes on a quarterly basis to the State Board of Equalization at the same retail sales tax rate. So trucks do pay sales taxes!

    The problem is about how these taxes reach a city’s coffers. There are 2 tax reporting methods available. The first, is where tax revenues are “Allocated” and the other where revenues are “Assigned” to a city. The “allocated” method is somewhat vague, and, as a result, reinforce the myth that trucks do not pay taxes. They do pay taxes, it’s just harder to see.

    In the “Allocated” method, taxes are distributed from the state to a county, which in turn distributes money to a city. The amount is based on a “formula”, based on the accessed value of each county and city. In the “Assigned” method, the truck reports the address where the taxable sales were generated and the tax revenues go directly to that city. For example, if a truck were to operate 365 days(like a B&M) in just one city, and had annual revenues of $490,000, it would contribute $4900 to the city coffers, the same as the restaurant.

    So a truck will pay $5475 in parking fees and $4900 is sales tax for a total of $10,375, or more than double the amount paid by restaurants to a city.

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