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.

Best of breed: franchisee or franchisor?

Did chain headquarters forget to tell franchisees we’re in a downturn? Maybe franchisors are just too embarrassed to gripe about the times when so many licensees are turning conditions to their advantage. Consider what happened recently within several of the industry’s oldest chains. Franchisees proved once again that they can adapt far more readily than the home office to changes in the marketplace, no matter how trying. Their pockets may not be as deep, but their street smarts often make them better.

S&A Restaurant Corp. went bankrupt in spectacular fashion, turning away employees and patrons in preparation for a fire sale of the 200 Bennigan’s and Steak & Ales it operated. And franchisees? As the Bennigan’s on Pittsfield Road in Lenox, Mass., boasted on a banner this weekend, “Locally operated and still open.” It may not be one of the licensees that are looking to scoop up the franchisor’s shuttered stores, but it appeared to be doing just fine, capitalizing on local events like the area’s fifth annual Zucchini Festival and Sunday morning’s crafts fair/pancake breakfast fundraiser in a local park. All told, Bennigan’s franchisees hope to turn S&A’s inability to stay solvent into a chance to swell their ranks by 40 to 60 properties, presumably at prices that would make Wal-Mart wince.

S&A’s franchisees weren’t the only ones to spot an opportunity amid what many brand parents portray as the third circle of hell. Pizza Hut, another greybeard of the business, saw franchisee NPC Corp. ink a deal to buy 99 of the chain’s units from a fellow licensee for $35 million—or roughly $354,000 per store. Pizza Hut seems to be gaining sales traction after some difficult years, thanks to a new pasta takeout line and the addition of a bolt-on chicken wing concept called Wing Street. But while the home office is getting on its feet, NPC is galloping.

To be sure, not all franchisees are finding the current market to be a time of opportunity. Papa John’s recently acknowledged to investors that it’s “subsidizing” franchisees by eating some of increased costs of items it distributes from its commissaries to the field, instead of directly passing along the heightened expenses. It also noted that it sometimes exercises patience with franchisees whose situations make royalties a tough nut to cover.

But, as executives stressed during a conference call with analysts, nothing keeps a system healthier than able franchisees. “We are very focused on keeping good franchisees healthy during these tough times,” said CEO Nigel Travis.

There are probably a lot of franchisees saying the same thing these days about their franchisor.

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.