Gift cards get a loud, 'Bah, humbug'

Gift cards have consistently been a holiday blockbuster for the restaurant industry. But that streak’ll end if several public watchdogs have their way. They’re warning shoppers to forego the no-brainer gifts because the chain or restaurant accepting the card could go bankrupt after the holly wreaths and mistletoe come down.

Those Scrooges include Richard Blumenthal, the attorney general of Connecticut. He’s cited in a Hartford Courant column by George Gombossy as flatly advising consumers to bypass the cards because “many more restaurants” will throw in the napkin. Indeed, Blumenthal said he’s speaking with the Connecticut Restaurant Association about forming what amounts to an insurance pool. Restaurants offering gift cards would all contribute small amounts to the fund, which would be used to make good on gift cards issued by operations that go under. Consumers could tap the kitty for a refund, then use the cash on places still in business.

Blumenthal is clearly using some broad strokes to tar the industry. Is a well-capitalized chain steakhouse really as likely to go under as Salty Ed’s Fry House and Bait Emporium? Yet he’s reportedly saying gift cards from all restaurants should be shunned like an I.O.U. from Michael Jackson. No wonder Gombossy titled his column, “Use Gift Certificates Now, And Don't Give Any.”

But Gombossy and Blumenthal are hardly alone in suggesting Aunt Lil give you an argyle sweater instead of that $100 piece of plastic for Ruby Tuesday. An article in yesterday’s Los Angeles Times was headlined, “Consumer Alert: Are your gift cards safe?” It cited a warning from the Tower Group consulting firm that shoppers could lose $75 million charged on gift cards because the issuing store or restaurant goes bankrupt.

The story doesn’t point out that $75 million is a tiny, tiny portion of what will be charged just on restaurant chains’ gift cards. The figure for all restaurants, never mind retailers, runs into the billions. The National Retail Federation has pegged the total for both channels at more than $26 billion. Such a small potential loss means only a tiny percentage of card-issuing restaurants are believed to be at risk. Yet the article—and possible the Tower research—fail to provide that context.

Instead, the story notes that consumers reportedly held $20 million in gift cards when Sharper Image went bankrupt. It also reports that Bombay Co. paid cardholders 25 cents for every dollar that was left on their cards when the retailer soaped over the plate glass windows of 388 stores in August.

Both that article and the Courant column appeared before “Taps” was sounded for Circuit City, the big-box electronic retailer that presumably sold a lot of gift cards.

Yeah, there’s a danger to buying cards. But the industry needs to remind consumers that it’s routine for one restaurant chain to honor the coupons of another, even when both are still in business. It may become even more of a convention if additional concepts flat-line. When Bennigan’s company-run restaurants went bust, Texas Roadhouse offered to provide a free entrée to consumers who had gift cards from the chain. The patrons presumably could’ve also used the cards at franchise establishments, which stayed open.

For six or seven years running, gift cards have been the restaurant-industry equivalent of finding a new sports car parked in the driveway on Christmas morning. It would be a shame to see that Maserati repo’d because consumers were frightened away from a holiday staple that giver, getter and seller all appreciate and value.

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.

The industry's knee-deep--in fertilizer

For a preview of the renaissance that’ll up-end the restaurant industry in a few years, look to a shuttered dinnerhouse in Spartenburg, S.C.

After 29 years in business, the Steak & Ale there died with the rest of the brand this summer, locking its doors to the 50 or so employees before they mustered for a shift that could’ve been a replay of the prior day’s, and probably the day’s before that. Later this week the place will fire up its grill again, this time as Steak and Spirits, with many of the former employees back in their familiar roles. Yet they’ll hardly be aiming for business as usual now that they’re the ones deciding what’s best for guests and the operation. All those ideas that arise from talking with and serving patrons can actually be implemented, instead of dying in some corporate suggestion box.

“Now that we’re not corporately owned, we have the freedom to do some things,” past and future manager Carol Easler told a local news media for a story.

Easler and her reassembled team will indulge their pent-up entrepreneurship because the new backers apparently appreciate the staff’s intuition for what works, what doesn’t, and, most important, what guests really want. The same dynamic will likely come into play as the economic downturn erodes the corporatism that has homogenized casual dining into the foodservice equivalent of rice cakes—plain, unsalted rice cakes. A death knell for hidebound restaurant companies will undoubtedly put restaurant operations within the grasp of more free thinkers, if not downright radicals. With sites becoming affordable and new ideas trumping big-company resources with a public craving originality, we’re heading into a period of unparalleled creativity for the business.

It’s exactly what happened after the economic shin kick of 1991. If memory serves me correctly, the IPO class of ’92 included Outback, LongHorn and LoneStar, to name a few high-flyers of the next decade. At the time, each brazenly shot a finger at the status quo. Now they’re as subversive as a powder-blue leisure suit.

It’s a shame that the industry has to lapse into shambles for a new generation of innovators to arise. But does anyone doubt that it’s long, long overdue?

Sighs of the times

This is an entry about the economy, but it poses as a lapse into what blogging’s detractors call The Cheese Sandwich Syndrome. They bemoan the tendency of many bloggers to recount the mundane aspects of their lives—i.e., “Today I had a cheese sandwich”—in the mistaken belief someone cares. But you might be interested this time if you’re one of the restaurateurs who’ve been contending the economic crisis of the last month has largely been contained to the financial world. “Wait until it hits the general public,” they warn. Based on my experiences of the last few days, we’re already there, folks.

As my bio notes, my wife and I share our house with three greyhounds that were retired from racing. On Monday we were asked to take in a fourth because its adopter had been evicted from her home because of a change in her economic situation. The dog is 12 years old, which means she’d had him for at least seven years, and possibly a decade or longer (greyhounds can only race between ages 2 and 5, and rare is the dog that stays competitive for that long.) Jim B. also has some health issues. The woman had to give up Jim, her lone companion, because she couldn’t afford to keep him.

It’s the sort of story my parents would tell about the Great Depression.

That’s Jim to the right, by the way.

Taking care of him requires a fair amount of time, which has been in particularly short supply since Monday. That’s because much of the last few days has been spent in conversations with friends who’ve lost their jobs or key clients and are looking for leads. Each is a highly qualified individual whom I’d hire in a minute, and unemployment is as novel for them as it is unpleasant. These are victims of the times, not symptoms.

A looming economic crisis? I suggest you look out your door. The crisis is here. The question is, how much worse will it get?

Reality bites

A long-time acquaintance confided tonight that his restaurant company will soon have to cut its staff because of the economic situation. The operation is of a size, he explained, where he’ll have to let go friends and what he termed members of his family. He didn’t need to tell me how upset he is by the prospect.

Welcome to the restaurant industry post-meltdown. Tonight we kicked off our annual MUFSO conference with a slam-bang cocktail party featuring the specialties of Washington, D.C.’s top restaurants. The conversations were as varied as the drink orders. But sooner or later they tended to flit back to the issue of the moment: How bad is this economic situation, and when might the industry feel some relief?

There was hardly a uniform opinion on the when, though the consensus seemed to be that we’re many months away from relief—at best. And as for the depth of the downturn, the universal assessment could be summed up as a shrug. The one point of agreement: The situation is unprecedented. And I heard that from persons whose tenure ranged upwards to 24, 35 and even 50-plus years.

Undisputed was the notion the economy is in standstill mode until the public gains some confidence that relief is foreseeable. The hope for resolution has been tossed aside. Executives spoke wishfully of a change in the trend lines, never mind a solution.

Yet, virtually everyone stressed, the cycle will turn. It may be a different industry that enjoys the rebound—and certainly a smaller one, most agreed. It’s the pain many will feel between now and then that seemed to be the concern of attendees.

'An order for Sec. Paulson'

I’ve gotta be quick here because a call from the federal bail-out specialists could come at any second. I alerted them yesterday that an institution crucial to the financial health of New York-area restaurants, a venerable borrower called Romeo Enterprises, was teetering on the brink of insolvency. If they were willing to lend AIG $85 billion, they can certainly toss a few grand my way.

Then again, the government’s rescue efforts have been decidedly selective. Freddie Mac and Fannie Mae got a bailout, as did the insurance giant whose past CEO, Hank Greenberg, still prompts Wall Street insiders to cross themselves and mutter a protective spell at the mention of his name (he was forced out in 2005 because of fraud allegations leveled by New York’s attack-dog attorney general at the time, Elliot Spitzer, who subsequently dropped the charges). Curiously, AIG got into trouble by insuring very complex financial securities, in effect assuring the backers they wouldn’t lose everything. Investors always say you get rewarded for risk, but the insurer’s role was to provide a safety net so some really big paybacks would be protected. Speculation, indeed.

When it looked as if gazillions would indeed be lost because of AIG’s problems, the government stepped in, arguing that it had to avert economic disaster. And, indeed, the company’s failure might’ve emptied plenty of portfolios and pockets. Just ask the foodservice establishments that counted Lehman Brothers among their major sources of business. Delis and restaurants that served the banker are already feeling the loss, according to news reports, when Lehman filed for bankruptcy only a few days ago.

They and other small businesses are getting walloped because the feds decided Lehman had to sink or swim on its own strengths, whereas AIG is too big of a fish to let flounder.

In other words, if you’re wearing a suit, “Here’s a life preserver.” But if those are foodservice whites on your back, “We prefer to let the market regulate itself.” Size clearly does matter when it comes to portfolios and paychecks.

Maybe those strained delis and restaurants can reach out to AIG’s business associates. Perhaps with a promotional Fat Cat sandwich, made with pork, of course.

And they should be sure to come up with something higher end for the big-portfolio'd sort who’s expected by many in the blogosphere to be brought in as AIG's savior. His name is Hank Greenberg.

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.