An unanticipated outcome of this Kat’s lockdown experience has been a reappreciation for the local stores on high street and how they come to enjoy goodwill. Somehow, considering the goodwill of Walmart or Apple is not the same as talking about the goodwill of a neighborhood store. “Okay, Kat, I get it that you are concerned about your local businesses. But do you have you something worthwhile to tell Kat readers about goodwill?” “Glad you asked”, I replied, “Consider the following, and learn a bit about what animals can teach us.”
On the high street in my town there is a store front that has been the site of numerous attempts by restaurateurs and other food types to establish a successful business. Back in the 1990’s, Starbucks tried to do so at the site but without luck. Others followed, but ultimately all were doomed to close. Still, several years ago, yet another enterprise tried its luck, called “Borochov 88.”
In effect, a flourishing restaurant by the same name had been operated about a mile and one-half away that was located at… you guessed it, 88 Borochov Street. The idea was to establish a branch of sorts, poised to take commercial advantage of the successful name of the restaurant at its original site. Unfortunately, this branch too failed (although the original restaurant continues to flourish).
After additional failed efforts, yet another eatery tried its luck at the site. This time, it was a restaurant named “Sarah’s Place”, which had previously been located about 600 yards away in a small site on a side street. [Merpel adds: “Yes, it appears that there really was a Sarah”.] Sarah’s Place on the side street closed and it reopened on the high street site, in much larger facilities. It seems to be doing gangbusters, with constant and devoted custom.
And so, the question: what is the secret of the goodwill between that enjoyed by Sarah’s Place versus the failure by Borochov 88, both at the same high street site?Lord Macnaughton famously observed in IRC v Muller and Co’s Margarine [1901]:
What is goodwill? It is a thing very easy to describe, very difficult to define. It is the benefit and advantage of the good name, reputation and connection of a business. It is the attractive force which brings in custom. …. However widely extended or diffused its influence may be, goodwill is worth nothing unless it has power of attraction sufficient to bring customers home to the source from which it emanates.Eloquent—indeed yes. But as a road map for making a legal determination of what is “the attractive force which brings in custom”, less so. The jurisprudence of passing off has spent more than a century trying to put legal meat on Lord Macnaughton’s frame of reference. A novel approach to the question, deriving from the English case, Whiteman Smith Motor Co Ltd v Chaplin [1934], in which a zoological classification of goodwill is employed and then reworked in the Australian judgment of Federal Commissioner of Taxation v Williamson [1943], is as follows:
As an abstract proposition, there can be no doubt that a particular goodwill may be local or personal or partly one and partly the other. It is local to the extent to which the trade connection depends on the place in which the business is carried on, …. It is personal to the extent to which it is the personality, ability and good reputation of the trader that attract the trade and not the place where it is carried on....So what does this description tell us? Regarding Borochov 88 on the high street site, the initiative was likely doomed from the outset. The patronage was apparently tied mainly to its original location, with no or little commitment to the person behind the business at that site.
Goodwill has been said to be "the attractive force which brings in custom" [reference omitted]. Hence, to determine the nature of the goodwill in any given case, it is necessary to consider the type of business and the type of customer which such a business is inherently likely to attract as well as all the surrounding circumstances. Now, customers vary. In Whiteman Smith Motor Co. Ltd. v. Chaplin the types were zoologically classified into cats, dogs, rats and rabbits.
The cat prefers the old home to the person who keeps it, and stays in the old home although the person who has kept the home leaves, and so it represents the customer who goes to the old shop whoever keeps it, and provides the local goodwill. The faithful dog is attached to the person rather than to the place; he will follow the outgoing owner if he does not go too far.
The rat has no attachments, and is purely casual. The rabbit is attracted by mere propinquity. He comes because he happens to live close by and it would be more trouble to go elsewhere.
These categories serve as a reminder that the goodwill of a business is a composite thing referable in part to its locality, in part to the way in which it is conducted and the personality of those who conduct it, and in part to the likelihood of competition, many customers being no doubt actuated by mixed motives in conferring their custom.
“Cats” (who might be loyal customers at the original site) could not be depended upon to also frequent the new site, while “rats” were random customers and could not be relied upon in building up goodwill. This left “dogs” and “rabbits” as potential customers, but neither had much incentive to prefer patronizing the high street site instead of the original location.
To the contrary, Sarah’s Place enjoyed a firmer basis to enjoy goodwill after the move. That the high street relocation was located only 600 yards from the original site was attractive to “rabbits” and maybe even “cats”, while the identity of the owners at the new site would draw “dogs”. Here, as well, while the custom of “rats” was welcome, they could not be relied upon as a material basis for goodwill at the new site. So, Kat readers, the next time that are asked to opine on goodwill, you could do worse than remember what cats, dogs, rats and rabbits can teach us. Animal Farm anyone?
By Neil Wilkof
Photo on upper right courtesy of Verena von Bomhard.
Photo on upper left courtesy of Renana Wilkof Segev.
Photo on lower right is by AnemoneProjectors and is licensed under Creative Commons Attribution Share-Alike 2.0 Generic license.
Photo on lower left is by EIC and is licensed under Creative Commons Attribution Share-Alike 3.0 Unported license.
Want to understand goodwill? Ask the cat, dog, rat and rabbit
Reviewed by Neil Wilkof
on
Sunday, May 24, 2020
Rating:
Reviewed by Neil Wilkof
on
Sunday, May 24, 2020
Rating:
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I dare say Borochov 88 enjoys as much goodwill as Sarah's Place in its original location, given that it continues to thrive there. Surely the difference is that Sarah's moved, rather than opening an additional outlet. This presumably meant that all the staff moved, and loyal patrons had no alternative but to transfer their patronage to the new location.
ReplyDeleteBorochov's business objective was different. It wanted to develop a new clientele at an additional location. Its existing customers presumably had no incentive to transfer their patronage (and why would Borochov want them to - the aim was not to harm its existing successful business). In that sense, the new outlet was no different from any of the failed businesses that had preceded it.
I dare say there are ways to parlay goodwill to achieve a successful expansion of this type. Franchising models, for example, are entirely dependent upon such an approach. Borochov obviously got it wrong!
Did the restaurant at Borochov Street have a name? Maybe customers or potential customers did not realise that the restaurant on the High Street was the same people?
ReplyDeleteThe Australian judgment loses some of the subtlety and humour of Whiteman Smith v Chaplin, where Scrutton LJ says
"There remains a class of customer who may neither follow the place nor the person, but drift away elsewhere. They are neither as benefit to the landlord nor the tenant, and have been called "the rat" for no particular reason except to keep the epigram in the animal kingdom. I believe my brother Maugham has introduced the rabbit, but I will leave him to explain the position of the rabbit."
Maugham LJ explains
"But really there should be a fourth animal, the rabbit, to indicate the customers who come simply from propinquity to the premises; and, if this is borne in mind, it will be apparent that the rabbit may be much bigger than the cat, who (if indeed it does not wholly vanish) may well shrink to the dimensions of a mouse."
I suppose the IPKAT did not like the sound of that ...
Incidentally Neil, how long have you been living in Israel - and still reckon distances in miles and yards? Well, I suppose you can't teach an old dog new tricks ...