Light bulbs above some heads

A few weeks ago, the restaurant industry was reeling from a shortage of customers, and hence sales, and therefore profits. Worst of all was an acutely low supply of something just as critical: Creative ways of contending. Now, at least, it looks as if that drought is easing.

A glimmer here and a rumbling there suggest economic conditions are separating the industry thinkers from the Dan Quayles—the folks who think brilliant leadership is picking the right idea to copy. They’re lemmings looking for the parade sign reading, “Cliff this way.” It’s the mindset that has landed much of casual dining in its current predicament.

Contrast that spud-headedness with a few initiatives that have come to light in recent days. Daily Grill’s parent company is cutting its cash outlays by paying executives 10 percent of their compensation in stock instead of dollars. It gives new meaning to the cliché, “win-win.” The company saves on salaries, the executives get paper that could be worth far more if they can drive up the stock price, and other shareholders get a management team that’s highly motivated to work for their benefit. Raise the value of the stock and everyone gains.

There’s also the public relations value of letting the world think the home office has cut its top-paid execs’ take-home, when in fact it’s given them something with the same face value and the potential of being far more precious. Indeed, from the recipients’ standpoint, it’s better than getting stock options—provided they don’t let the stock price decline any further (see earlier reference to management’s and shareholders’ perspectives being aligned.)

But that’s not the only ah-ha notion that’s been aired recently. Consider Sonic’s plan to lower its labor expenses while boosting customer service and possibly increasing the take-home pay of carhops. The drive-in chain is in effect reclassifying the runners who bring orders to patrons’ cars as tipped servers. It hasn’t said how it’ll trumpet that recasting to customers, but executives said in disclosing the plan that most guests already leave a gratuity. By formalizing the tendency and encouraging carhops to strive for tips, the chain can claim a tip credit, thereby cutting what it’s required to pay the staffers as a minimum wage. Yet the carhops are likely to end up with more money than they did when they were collecting the full wage.

What’s more, with an hourly-staff turnover of about 100 percent, the chain can phase in the program by merely extending it to new hires. The transition would only take a year, presumably with no shock to carhops who are accustomed to getting the full minimum wage.

Not all of the innovations are far afield. The Pollo Tropical fast-food chain, for instance, merely replaced its sandwiches with wraps. It correctly anticipated that wraps would be easier to eat on the go, and presumed that benefit would appeal to the chain’s mobile clientele. Units are selling 50 to 60 wraps a day, compared with the 15 to 20 sandwiches they formerly peddled, executives told investors Wednesday.

In still other instances, the course was apparent. It just took leadership and courage to pursue it. Every franchisor would readily attest that its success rests on the financial wellbeing of franchisees. Yet few have backed up that assertion with the sort of action that Papa John’s and Domino’s have recently taken.

The former made news Tuesday when executives revealed that the franchisor’s commissary operation would roll back the prices of the cheese it sells to franchisees. The wholesale cost paid by corporate likely hasn’t receded; Papa John’s must be absorbing the cut in its margins. It’s taking the hit to enhance the profitability of franchisees, even though royalties are based on sales, not the bottom line. But by keeping licensees healthy and thriving, the home office is betting it will benefit in the end.

To keep franchisees growing, Papa John’s is also looking at ways of becoming their bank. Because they’re struggling to find the capital needed for expansion, the franchisor is willing to serve as their pipeline until the tap is reopened by more traditional sources. One of the core rationales for franchising is the use of licensees’ capital to build a chain. Papa John’s, much to its credit, is rethinking that tenet of the situation.

It may be inspired in part by arch-rival Domino’s, which disclosed last month that it was providing franchisees with financing. “It will never be my preference to provide financing to our franchisees,” CEO David Brandon commented to investors. “We would rather keep our relationship with them focused on being the franchisor rather than their bank. However, we are wading through uncharted waters.”

Better to be slogging through them than being carried along by the current, hoping you’ll eventually land upright.

Crunch time?

The business week is only a few hours old, but it’s already yielded indications that restaurant chains are trying two new tacks in their product introductions: Tout texture, and crow about being better if you can’t brag about being first.

Both trends are evident in KFC’s new product, a knock-off of McDonald’s Snack Wrap called the Toasted Wrap. Like McDonald’s chicken snack, a home run by anyone’s standards, the new Toasted Wrap snack is priced at $1.29. It, too, consists of all-white chicken, lettuce and a flavored sauce, all wrapped in a flour tortilla. But the little bundle is then grilled, giving it a bit of a chewy texture. The chain is touting that difference in feel with consumer “touch” tests, presumably pitting the Toasted Wrap against the Snack Wrap in head-to-head comparisons where consumers indicate which feels preferable.

KFC makes no bones about following McD’s lead; the latter’s product is cited in the announcement of the Toasted Wrap’s introduction.

Meanwhile, Papa John’s, an arch-rival of KFC sibling Pizza Hut, is pursuing a similar strategy with its latest product promotion. The chain is touting the texture of its re-formulated pan pizza, the Papa’s Perfect Pan. “The product features a crust that’s irresistibly crunchy on the outside and soft and chewy on the inside,” explains the promotional materials. The literature also describes the pizza as tasting better than ever, without a word about the flavor.

The chain is offering a free perfect pan to anyone whose birthday falls on Feb. 29.

Interestingly, arch-rival Domino’s Pizza also launched a promo today tied to the current Leap Year, though you have to do more to cash in than merely have a Feb. 29 birthday. The delivery chain is offering to throw a pizza party for every family that has a child on Feb. 29 and names it “Brooklyn,” a tie-in with Domino’s Brooklyn-style pizza. The first to use the name gets a sweetener of $1,000. Which, no doubt, will go toward later therapy for a kid who was named after a pizza so his or her family could get a free party.

Are things bad all over?

If the restaurant industry has slogged through a worse reporting period than the last few weeks, a guy named Hoover was probably president—if not somebody named Voldemort. In a 19-day stretch, Domino’s posted a 55-percent freefall in net income, Ruby Tuesday posted a 48-percent plummet, Brinker notched a 21-percent decline, Wendy’s disclosed a 56-percent dive, P.F. Chang’s earnings sank 20 percent and IHOP finished $11.6 million in the red. For all but a few industry standouts (notably McDonald’s and Tim Hortons), the recent past has been the stuff of blues songs.

The industry has certainly shrieked through its share of rollercoaster drops before. As Ruth’s Chris CEO Craig Miller noted during MUFSO, the current ills of sky-high fuel prices and surging food costs are minor compared to what he saw in the 1970s, when President Nixon froze prices to check inflation and consumers couldn’t buy gas at any price because of an OPEC embargo. This is nothing compared to then, he suggested.

But what makes Quagmire 2007 unique, at least out of all the restaurant downturns I’ve witnessed, is its lack of discrimination. In past sales chills, business usually shifted, with the big brands wresting traffic away from the scrawnier players in a display that would have had Darwin smugly nodding. But this time, the dynamic seems to be more of a lowering tide. Many of the companies that reported their earnings with a decided wince were the very ones that filed their SEC documents with a swagger just a short while ago. This is truly a macro-effect, not a bad story with plenty of footnotes. The list of the unaffected is shorter than a mash note to George Steinbrenner.

Which, of course, underscores the question, What’s the industry to do? Miller offered his recollections of worse times to illustrate that better conditions will return eventually. But how can a chain hurry it along?

BJ’s Restaurants, one of the companies to clearly prosper during a period that most competitors characterize as a kick in the groin, has a very definite idea. “In this difficult operating environment, where consumer spending for casual dining occasions and the prime costs of doing business will likely continue to be under significant pressure on an absolute basis for the foreseeable future, we believe the more successful casual dining concepts will be those that protect their overall consumer 'approachability' for all dining occasions and that offer even greater quality, differentiation and overall value to the consumer," CEO Jerry Deitchle was quoted as saying in the company’s announcement of a 31 percent rise in net income on a 30 percent rise in revenues for the third quarter.

I’m not crystal-clear on what he means by “overall consumer ‘approachability,’” but I assume he’s trying to say that the objective is boosting customer frequency, a laudable goal. Certainly that’s more ambitious than the usual approach of trying to buy customers by giving them a deal, a reflex that can haunt a chain for years to come.

Avoiding that knee jerk to focus on “approachability” and differentiation—an objective that should trump the others, in my estimation—would be as much of a departure from the norm as this downturn itself seems to be.