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.

Where have you gone, Joe Lee?

Casual dining has never needed Joe Lee as much as it has in the last few weeks.

It’s not as if the former Darden Restaurants CEO has some superhero ability to yank the sector, a market he helped to create, out of its current blues jam. But his 40 years or so in the business gave him a perspective, a wise-man-on-the-mountain sagacity, that most of today’s standout executives have yet to cultivate. They stand in front of shareholders, analysts or employees and spout assurances the company’s recovery plan will work. After all, they somberly assert, we have the best concept, the best people, the best food, the best investors, the best corporate mission statement.

Yet they seem more than a little shaken themselves. You expect some to reach inside their suit-jacket pocket, take a quick nip from a flask, and resume with the platitudes.

Joe, as proper a man as ever worked in the industry, would stand up there and draw his share of arrows from financial analysts who wanted better returns for their institutional customers. Yet even during the most blistering times, he would calmly explain that the sector was in a downturn, that it’s been in downturns before, and that it’ll be in downturns again. He’d seen it two or three times in his career, and each time casual dining snapped back to be stronger than ever.

No one in the room could doubt it because most of them hadn’t lived as long as Joe had run the New York Yankees of casual dining. This was the guy who managed the first Red Lobster, back before there was a T.G.I. Friday’s, a Chili’s, an Applebee’s, an Outback or a Ruby Tuesday. And who could challenge a man who’d left the market only once since then, to work at the top of Red Lobster’s then-parent, a little multinational called General Mills.

The footnotes to his message were clear: There’s no need to cash out to a private equity firm, jump to a new market position, clean out your “C”-level officers, fire the ad agency, or even rewrite the mission statement. Instead, execute well, seize the opportunities that may be afforded by the players who fail to executive well, and ride it out.

No doubt the current freefall in casual dining is going to eliminate some weaker brands. But the sector as a whole?

Tell ‘em, Joe.

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.