Wednesday, July 30, 2008

Quaking icons

The earthquake in Los Angeles hit 5.4 on the Richter scale, but it was a shiver compared with the aftershock from yesterday’s collapse of a casual-dining icon. The public was reminded in story after story that the flat-liner was the company that built the venerable Bennigan’s and Steak and Ale chains. But the industry knew S&A Restaurant Corp. on a far more emotional level. For many of casual dining’s best and brightest, the company was the finishing school where they learned the business. The bankruptcy filing must’ve been like seeing your first home razed.

If the foodservice industry had the equivalent of a Cooperstown, the list of S&A alumni could serve as the roster of charter nominees: Chris Sullivan, Bob Basham, Tim Gannon (all of Outback fame), Doug Brooks (Brinker International), Dick Frank (Chuck E. Cheese’s), Dick Rivera, Hal Smith, Wally Doolin, Rick Berman, Lane Cardwell.

I used to joke that the MUFSO conference was just an S&A reunion in disguise. If an attendee was in a senior post at a casual-dining chain, chances were extremely high that he started at the operation that Norman Brinker conceived in the ‘60s as the obvious trade-up for baby boomers as they outgrew fast food. And for years it grew with their spending power and desire to dine out, becoming an industry force and prompting more imitation than the first reality-TV series.

But the company became part of a huge corporation and suffered the usual fate of losing its verve and agility. Upstarts roared past it, leaving the one-time innovator in a time warp.

More recent regimes did their best to revive the concepts, but the numbers suggest it was a pitched struggle. Systemwide sales for Bennigan’s, the spryer of the two concepts, slipped by about $13 million last year, and the chain contracted by about 10 stores, according to NRN research.

The times ultimately proved too daunting for the brands’ owner, prompting it to file for bankruptcy of the Chapter 7 variety. But franchisees believe they can make a go of it. The scuttlebutt is that they’ll try to provide the unification and support that once came from S&A. The model seems to be Ground Round, whose franchisees similarly found themselves orphaned when their franchisor suddenly threw in the napkin.

Now, of course, everyone is wondering what restaurant chain might be next. In media ranging from overseas newspapers to National Public Radio, the bankruptcy was cited as a weathervane for the economy, a milestone on the road to ruin. The surprise development is being portrayed as a leading indicator.

A fair-sized group of casual dining veterans probably knows better. They’re likely aware that many of S&A’s problems were a function of age and decisions made—or not made—decades ago.

For them, it was likely a seismic shift of another sort, and far more saddening than worrisome.

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Thursday, July 24, 2008

Why wait 'til March for madness?

My friends are a little worried because I like to kick off restaurant chains' earnings season with a tailgate party. And why not? We’re talking quarterly updates from the biggies, people. And then come the conference calls, where you can ease back with a hot dog and a beer while investors do some serious grilling of public-company execs. Who needs Six Flags or Vegas? Especially during a financial-reporting stretch like the current one, when the action’s been wilder at times than a Sweeps Week on Fox. Consider, for instance, the mysterious disappearances that have recently come to light.

Where, for example, was Chipotle’s copy of the memo that every other public restaurant company must’ve gotten? It’s the one about cutting expenses because of spiking food costs.

It was certainly right there in Chuck E. Cheese’s “In” box. The pizza and games chain countered high cheese and dough expenses by trimming the size of its large and medium pizzas by a half-inch.

P.F. Chang’s, another apparent recipient, is focusing its efficiency efforts in part on labor. The company told investors that it’s revising the responsibilities and recruitment processes for the unit-level managers at its Pei Wei Asian Diner concept in part to eliminate one supervisory position. It’s also simplifying and shrinking the fast-casual chain’s menu to cut prep space and kitchen labor, while also deleting some high-cost selections that don’t sell well.

Somehow, the mandate to take similar action never reached Chipotle. “It would be plausible to try to squeeze costs out of the food line or labor line or to aggressively raise prices,” said president Monty Moran. “We’re not going to do that.”

Instead, executives said, the chain is directing more units to use additive-free chicken, which costs 20 to 50 percent more than the standard version, and is buying more locally grown produce. So much for economizing on kitchen supplies.

Chipotle might also see some pressure on labor expenses because of the ongoing salmonella outbreak. Since the federal government now believes fresh jalapeno peppers could be the source of the contamination, the Mexican chain is grilling all of the peppers that it formerly served raw.

The same vanishing act must’ve been pulled with Chipotle’s copy of the Official Restaurant-Chain Handbook, or at least the page that deals with international expansion. Charging beyond the boundaries of the United States is as important to the success of many restaurant brands these days as selling soft drinks. But not, it seems, for the 778-unit burrito specialist. Founder and CEO Steve Ells revealed that the chain’s international strategy consists of opening a lone unit in Toronto. “I want to remind you that international expansion is not a key driver of our current growth strategy,” he observed after noting that Chipotle has never needed a passport before. Hopefully he spoke loud enough to override the gasps of investors who’ve grown accustomed to hearing chains project hundreds of overseas openings.

The disappearances involving Chipotle were parlor-room stunts compared with the Houdini feat that The Cheesecake Factory pulled off. One day, as he had for the prior eight years, Michael Dixon was serving as an executive of the casual-dining company. The next, he was gone. His resignation and departure as CFO came the same day.

Cheesecake founder and CEO David Overton said it was just a coincidence that Dixon vamoosed hours before the company disclosed that its profits dropped 19 percent during the second quarter. He also declined to put forward any other explanation.

Maybe he should’ve just uttered, “Abracadabra,” and been done with it.

Okay, time to throw another hot dog on the grill and see who else is reporting today.

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Thursday, July 17, 2008

Compromising position?

Moving to higher ground is a sound strategy if you’re running for president or trying to escape a flood. But what if you’re a broad-market restaurant chain that wants to out-class the sector? Consider what the heads of Ruby Tuesday and Applebee’s have to say on the matter. Then climb a mountain and ponder how such similar assessments could prompt them to move in such opposite directions.

Both have acknowledged to investors that management pushed the concepts beyond the comfort zones of longtime customers when they drove the chains up-market. ““We often overshot the brand in the pursuit of a more upscale customer while frankly failing to deliver on the expectations of our core users,” said Julia Stewart, CEO of DineEquity and the proclaimed chief strategist for Applebee’s, which the IHOP parent acquired in November.

Sandy Beall, founder and CEO of Ruby Tuesday, had similar things to say when he addressed analysts last week in a conference call. The past year was a tough one for the casual-dining chain in part because of the environment—“as difficult as I’ve ever seen it,” remarked Beall, who started the company in 1972. But, he admitted, “We also probably hurt ourselves.”

The company remodeled 650 restaurants in less than a year, which may have distracted the team, Beall explained. And some patrons may have been driven off by the new look—“lower-end guests who maybe felt less comfortable in our reimaged restaurants,” he observed.

Stewart has indicated that Applebee’s will shed its highfalutin ways and refocus on the brand’s traditional strength of offering reasonably priced finger foods and a centerpiece bar. In short, it’ll shift back to the concept’s longstanding position as an everyday dining choice—a true neighborhood option.

Contrast that direction with Beall’s pronouncement on Ruby Tuesday’s upscale push. “We now have a completely integrated high quality brand with consistency among its key elements of food service and the restaurant’s look and feel,” he told investors. “This is very, very important.”

He didn’t reconcile that enthusiasm over the chain’s new positioning with his earlier comment about alienating some customers. But he did add, “The soundness of our strategy is also indicated by the fact that our customer base is changing…For example, it is becoming a little more affluent, which is what we wanted, with 44 percent of our customers having income greater than $75,000 compared with 38 percent three years ago.”

Clearly he wants the brand to be more of an Acura, while Applebee’s is betting that a Honda is really what the market appreciates.

Both, of course, could be correct. Meanwhile, the industry as a whole seems to favor the third option of claiming the middle ground, whether that means sliding up or down the spectrum. Fast-feeders ranging from Burger King (with its Whopper Bar, a high-end diversification featuring cocktails) and Subway (with its Subway Café) are nudging their brands further up the pricing scale. At the other extreme are fine-dining chefs like Bobby Flay and their launch of burger concepts, like his just-opened fast-casual concept, Bobby’s Burger Palace. Like many a presidential candidate, restaurant operators seem prone at the moment to drifting toward the center.

Unless, that is, they’re already there, like the family dining specialists. Denny’s, for instance, is edging into quick-service turf with its scaled-down Express concept and B-FST 2GO program. And IHOP has aired intentions to diversify into the fast-service arena of airports.

It sounds like a mess, but it’s really a much-needed shake-up of the status quo. Brands are reconsidering what they are and what they want to be. Unfortunately, many are likely to discover that those are two extremely different things.

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Tuesday, July 15, 2008

Bugging out

Salmonella is haunting my social life. Lately, while dining with wife and friends, I’ll look up to find the whole table staring. Then the Simon Says starts. Peter spears a tomato wedge; everyone spears a tomato wedge. A bite of lettuce, and soon the whole party’s crunching. It’s like having dinner with a newly discovered aboriginal tribe that’s not sure what to do with a fork.

Finally, the ah-ha moment: “Peter writes about food safety,” my wife whispered across the table to a couple whose acquaintance we were just making. “He’s been covering this whole salmonella thing and what they think may be causing it.”

Suddenly, I’d become the arbiter of what’s safe to eat.

So, of course, I started messing with them.

A forkful of salad, then a loud, showy gulp of wine. “Kills the germs,” I whispered conspiratorially to my fellow diners. Soon they were knocking back the red and white like pirates on leave.

I’ve been tempted to stare at my full plate for a second, yell “oh, no,” then bolt from the table. But the situation is already too much like a Will Ferrell movie.

But dim-witted clowning might still be better from a restaurateur’s standpoint than the speculation my friends have demonstrated. Like the one who drinks warm soda because she saw a Sweeps-week news story about high bacteria counts in some restaurants’ ice. Or the college professor who hesitated, his fork in mid-air, after being served. “Tomatoes are okay now?” he asked. The only type on his plate were cherry tomatoes, which had been cleared as safe to eat virtually from Day One of the outbreak. And this was six weeks into it, when the spotlight had shifted to peppers. “And how about spinach? Wasn’t there a problem with that?” he asked.

My wife, meanwhile, piped up with her theory that the culprit is probably onions. Not once have onions been cited by authorities as a suspect. But I’m sure she also blames onions for the housing crisis, reality TV and fallen arches. It’s a longstanding antipathy.

And the confusion is equally as persistent. Someday, hopefully before the list of casualties climbs any higher, federal health officials will figure out what has sickened almost 1,100 people. But until they do, customers are going to order in accordance with their preconceptions, regardless of how off the mark they may be. And they might keep doing so even after the mystery is solved.

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Sunday, July 13, 2008

Suddenly, everyone wants to be in onsite

If Danny Meyer utters, “Nice day,” weathermen probably adjust their forecasts accordingly. He’s regarded with such respect and admiration that world leaders likely buzz him from time to time at Gramercy Tavern or Union Square Cafe, eager to check their world view against his. And what’s he likely to say if the Pope makes small talk about where the restaurant sage is planning to open restaurants during times like these? The Pontiff must grab his hat when he hears “onsite,” a segment once typified by cafeterias and scaled-down outposts of the big fast-food chains.

Yet that’s the bold expansion initiative that Meyer detailed late last week to the onsite specialist of Nation’s Restaurant News, Elissa Elan. Meyer has created a new division within his Union Square Hospitality Group, an operator largely of fine-dining restaurants, expressly to develop the group’s concepts in pro-sports facilities from coast to coast.

Meyer is hardly alone among celebrity restaurateurs and fine-dining specialists in diversifying during these challenging times into so-called captive markets. A few years ago, Wolfgang Puck and Todd English snagged a sea of ink by lending their menus and reputations to airport locations. Once a footpath, that alternate route is quickly being trampled into a major thoroughfare as operators seize the opportunities of opening in department stores, sports and concert arenas, bus and train stations, casinos, hotels, ski resorts, even spas. It may be just a matter of time until a hospital patient can call down and have a meal brought up from the Gordon Ramsay outpost on the main floor.

Meanwhile, a whole new wave of chains, full and limited service, are right there with the folks in chef’s whites, vying for their piece of the onsite scene as well. As Elan also reported last week, you can now add IHOP to a list that already includes nearly all of the big casual-dining brands.

The deals are as diverse as the concepts involved. But you can readily assume some common advantages. For one thing, there’s the attraction during a time of softening streetside traffic of having a built-in market of sorts. The business can come in peaks and valleys, depending on events and the season of the year. But those peaks can be pretty high.

Operators also cite the sweetheart deals that some places will extend to put a big-name brand on the premises. And even without significant build-out assistance or a dream rent, the situation carries certain incremental advantages that can add up to a big plus. Several years ago I had dinner with a casual-chain operator who’d just landed his first casino location. The volumes he expected were astronomical, based on the host facility’s traffic. But, he noted with glee, his costs would be cut by piggybacking on the place’s purchasing, maintenance, inventory-control and credit card processing functions. It amounted in his case to a point or two of margin.

Of course, the risk is also sky-high. Screw up in a streetside location and you damage your reputation in the local market. Botch things in a site where half the world can be turned off and you have quite a comeback to engineer, on virtually a nationwide scale.

Which brings us back to Danny Meyer. He’s revered as the Jimmy Stewart of the restaurant industry in part because he foregoes gimmicks and bandwagon jumping. As he told Elan, USHG’s new Hudson Yards Sports & Entertainment division will try to learn next year from its initial at-bat, at the New York Mets’ new homefield, before swinging for the fences. It also plans to work with an experienced concessionaire, starting with Aramark at the Mets’ new Citi Field.

But his decision to move into onsite will likely be taken as a sanction. Meyer has yet to close a restaurant, or even backtrack from one of his initiatives.

Indeed, one of his most successful endeavors, the Shake Shack retro-styled burger concept, was actually a good deed that turned great, like cutting the elderly neighbor’s lawn and discovering oil in the process. It started as a cart in Madison Park, across from his Tabla and Eleven Madison fine-dining restaurants. Meyer’s staff sold hotdogs in the park as a public service, a payback to the community. The dogs became so popular that the city gave Meyer a nifty 1960s-style building in the park, where the lines were soon dozens of people deep.

Now Shake Shack generates volumes that rival some of Meyer’s white-tablecloth places, according to members of his organization. No wonder it will be one of the anchor concepts of Hudson Yards, with each new stadium or arena likely to sport one, according to Meyer.

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Thursday, July 3, 2008

Is there green in green?

The green movement has been a boon for puffins and wombats, but what’s it done for participating restaurants’ P&L’s? Subway co-founder Fred DeLuca used a rare public appearance earlier this week to divulge a few dollars-and-cents results for his brand.

The chain has snagged a fair amount of ink for what franchisees are doing with eco-friendly restaurants. The first wave—one unit in Florida, two in Oregon—did enough environmentally to earn a LEEDS (Leadership in Energy and Environmental Design) certificate from the U.S. Green Building Council. It's the Good Housekeeping Seal of Approval for ecological effort, earned in this instance by the use of ceiling tiles made of recycled material and reliance on sunlight for much of the interior illumination, among other steps.

The first green Subway, in Florida, cost $10,000 to $15,000 more to build than a conventional unit, DeLuca said during the Food and Restaurant Industry Forum, an event co-hosted Monday on Wall Street by the National Restaurant Association and NASDAQ.

The “jury is still out” about what return the franchisee might see on that added investment, DeLuca said. But he voiced doubts that the payback will offset the cost differential.

The wildcard, he said, is the value of public appreciation. “Some customers do choose that store over others—customer appreciation could pay off in the long term,” he explained.

Headquarters has described the green Subways as labs, and not necessarily prototypes. Officials say the stores will be used to develop and refine eco-friendly processes and features that could become part of the chain’s specs. They’ve also indicated that the first three units will be monitored for at least a year to determine how Subway’s operations mesh with the green backdrop. They’ve described the tests in part as an attempt to realize new efficiencies

The Florida unit opened in November, and the first foot long was served up in the Oregon stores in December.

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