Thursday, August 25, 2011

A 5.5 on the restaurant Richter scale

We had an earthquake this week in New York City, but the restaurant business likely felt a few tremors of its own, judging from recent developments.

In short order, we had the most significant executive change in years; further proof the business can be one big hurt for the unwary; and a strong reminder of why you should always wear clean underwear while dining out in the city, if you wear any at all.

Temblor 1: First, the personnel shift. It wasn’t shocking that California Pizza Kitchen named a new CEO after being acquired by a private-equity firm. The surprise was the selection: G.J. Hart, the longtime range boss at the Texas Roadhouse casual chain.

I always figured he owned too much Roadhouse stock to leave. The only way he’d exit would be if a P.E. firm took the company private and installed its own honcho.

Turns out Hart only holds 289,000 shares, or less than 1% of shares outstanding, according to last year’s proxy.

Which will undoubtedly work in CPK’s favor. Roadhouse was a standout among the crowded field of casual faux-honkytonks, a group that also includes LongHorn, Lone Star and at least seven or eight strong regional chains.

The other national brands went through some significant retrenchment. Roadhouse has been the steady ride in the field, the result of what strikes me as a customer as an intense focus on operations and the integrity of the brand. You have a sense of what the concept is all about.

Sometimes when I visit a CPK, I feel as if I’m in a Sbarro with waitress service. Is it a pizza place, a casual restaurant, an Italian dinnerhouse, a café? Hart’s skills will likely play directly into the chain’s needs.

Temblor 2: The MaggieMoo’s mix-in ice cream chain is led behind the barn. The concept will be absorbed into its sister brand (and what most observers cite as the originator of the format), Marble Slab.

Moo’s wasn’t exactly an industry powerhouse. But it did have its moments of interest as a franchise option, particularly when arch-rival Cold Stone Creamery was growing so quickly.

That wouldn’t be such a big deal on it’s own. But there’s also…

Temblor 2.5: A new flurry of media reports about Quiznos financial plight. The Wall Street Journal reported some time ago that the chain was struggling under a whopper of debt. New coverage, including in the Journal, suggest that the problem hasn’t eased at all.

Quiznos is no MaggieMoo’s. It made a splash in the sandwich market, both by growing at head-turning speed and undercutting competitors on price. It was also one of the franchise chains that everyone seemed to be talking about.

Franchise relations within the chain soured long ago. Not the operators are watching a train-wreck of a situation, and one that many of them predicted when the advertised price of sandwiches left crumbs for margins.

The moral here: Restaurant franchising has stepped up appreciably in recent years as franchisors sold off company stores, displaced white-collar workers decided to start their own businesses, and fast-casual emerged as a hot area of growth. Activity increased, but the risk didn’t decline.

Choosing the wrong franchise can still be disastrous, even though the emphasis today is on finding experienced operators who might already have other chain concepts in their brand portfolios.

Temblor 3: New Yorkers have turned their city’s exalted restaurants into one big orgy, according to a story in the most believable tabloid this side of The Onion, the New York Post.

“Tableside naughtiness is so widespread, the issue’s no longer whether you’ve had a dalliance at an NYC eatery; it’s when, where and how,” reported the Ruppert Murdoch-owned daily.

Bragging about where you’ve had sex is now as much of a status setter as being able to namedrop where you ate, or what celebrity works out at your gym, according to the piece.

My favorite quote, from Joseph Couture, the author of a book on public sex: “The only thing people drop faster than their inhibitions after a bottle of wine is their pants.”

Which makes you wonder how many restaurant patrons took the earth moving beneath their feet this week as a completely routine experience.

Wednesday, August 17, 2011

The precious need your help

In these extraordinary times, it’s important for the less troubled to help those in danger of falling victim to their circumstances, regardless of what we might feel about them. So, please, try to put your prejudices aside and help foodies recover their perspective.

Some observers have suggested selective euthanasia as a more humane way of helping the self-anointed dining elite. Many who eat dinner before 10 p.m. insist that idea has merit, though it’d be disastrous for merchants who specialize in black clothing and torturous shoes.

Far better would be a drive to show sport diners that the restaurant industry has more important issues to address—staying afloat, for instance—than the two topics currently preoccupying the Urban Spoon set.

Readers of a blog this cool would of course be familiar with the topics, but maybe your connection to Eater was a little balky this week. If so, you missed all the guffaws-in-type about Issue One: Did the celebrated Alan Richman really pat a server’s ass? And what was he thinking when he brought up the accusation, and a spirited defense, in a GQ review of the place where the transgression allegedly occurred?

I have trouble believing that Richman, the Derek Jeter of the reviewing game, would do such a thing. It’s very pertinent that the accusation came from M. Wells, a soon-to-close New York hotspot, after Richman cited some disappointments in his review (he entitled the piece, “Diner for Schmucks.”)

Even harder to believe is that he mounted a defense in print. But that’s just the start of the weirdness. You have to see it to believe it. Not since Michael Jackson got a pet chimp have we seen something this bizarre.

Then again, Lady Gaga’s outfits have nothing over Issue II, which uncomfortably plumbs how far a foodie will go to secure bragging rights about where he or she ate.

To reserve a seat at Washington, D.C.’s new quasi-pop-up, Rogue24, a dining room situated in an alley, you have to sign a two-page agreement. The contract stipulates that you can’t use your cell phone, or even its camera function, and cancellations have to be made at least 72 hours ahead of time. Otherwise, you’re charged a penalty fee.

Great. Formerly, you had to see a loan officer before dining in some of the nation’s hotspot. Now you have to consult your lawyer, too.

Next they’ll be selling tickets to restaurants, instead of giving you a bill.

Wait—did we mention the menu change at Grant Achatz’s Next?

Tuesday, August 16, 2011

Bankruptcy courts are busy again with restaurants

The restaurant industry is still analyzing the effects of last week’s funhouse ride on Wall Street. But one scream of fright should’ve been audible before the white-knuckle trading began: There’s been another wave of restaurant bankruptcies, this time of franchisees.

The busts tend to get less attention than the filings of a brand’s parent company, which themselves have been less than high-profile in recent weeks (the most recent chain to put creditors at arm’s length: Bill Johnson’s Big Apple, a five-unit chain of family restaurants in the Phoenix area).

Taken together, the bankruptcies prove the industry shakeout is still underway, this time on a market-by-market basis.

It’s tough to read a pattern in the failures. On first glance, fast food is the source for a disproportionate number. This Wednesday, an auctioneer in Dallas will sell off the Burger King units of a bankrupt franchisee. A bankrupt El Pollo Loco operator has nine units on the block in southern California. The weekend brought news that a Rally’s franchisee in Birmingham, Ala., was throwing in the paper napkin.

But the full-service sector has seen its share of failures, too. Chevys, a low-ticket casual chain, lost two stores in St. Louis when an eight-unit franchisee there couldn’t cut the mustard.

A number of family restaurants, including franchises of bankrupt Perkins & Marie Callender’s, have provided the bankruptcy courts with considerable business from that segment.

Here and there, a common element does crop up: Locations rendered unfeasible by the economic downturn. It’s often less a matter of a traffic freefall than a function of a rent that’s tough to cover.

The outcome should be healthier local markets. Supply usually dips, to some degree, and the shuttered stores provide an expansion opportunity if the landlord is more realistic going forward about the lease.

The question, underscored by last week’s roller coaster, is how all this uncertainty is going to affect consumers and lenders.

Wednesday, August 3, 2011

Ruth's O'Donnell: Making a plan work

This is the second installment of a three-part celebration of the industry's top turnaround stars. You can read the first installment, on Cheryl Bachelder, here.

The turnaround at Ruth’s Chris didn’t start out with a bang. It was more of the resounding-thud variety.

Like a lot of high-ticket concepts, the expense-account chain was kneecapped by the Great Recession. In February 2009, comps fell 23%. And that was after it’d rolled out a cut-rate deal to pull customers back. For a mere $39.99 per head, guests were treated to a three-course meal that included shrimp or a six-ounce fillet.

By Ruth’s-ian standards, it was a Dollar Menu. But the headwinds were too strong. Trade-offs to the discount lowered Ruth’s check average without drawing an offset in traffic. In short, it looked as if the concept was just discounting to customers it would’ve drawn anyways.

At the rate of decline, said CEO Mike O’Donnell, units would each lose $1 million in annual sales.

The next tactic didn’t work so well, either, or at least not at first. The chain put the spotlight on the flattop-grilled steaks and other entrees that had long been its signatures. They were grouped together into a special Classics menu. Customers would recognize the items, but not the prices, since they were lowered to a traffic-stimulating level.

Then came one of those smack-your-forehead moments. To hold down costs, Ruth’s simultaneously cut its advertising. So it had a deal, but no way of telling patrons about it. Guests were already in the unit when they learned of the special promotional session.

It didn’t look good for Ruth Fertel’s brainchild. But O’Donnell proved why he’s one of the toughest execs the industry has ever seen. His lengthy resume included stints during some of the roughest times at Champps, Sbarro and Ground Round. He’s also been fire-hardened by working at such operations as Outback and T.G.I. Friday’s. This is no crème puff.

He stuck with the Classics deal. Today, it accounts for about 30% of Ruth’s sales, which are on the rise. Traffic was up 3.3% in the second quarter, with a 2.4% rise in the average check, yielding an average sales increase per store of 5.8%.

Meanwhile, O’Donnell diversified the chain’s prices. A bistro menu put more affordable choices in front of customers, who could now return even if the company wasn’t picking up the tab.

He also pushed for group business, which had fallen like a stone. The installation of a satellite communication system provided an extra reason for businesses to hold their meetings at a Ruth’s, with banquet service included. In the second quarter, group sales were running 16% above the tally of a year earlier.

Now O’Donnell is trying to work the same program with Ruth’s secondary concept, the Mitchell’s dinnerhouse chain. The home office is diversifying the menu. While the Ruth’s brand is testing TV advertising, the smaller Mitchell’s operation is experimenting with radio.

Still, O’Donnell isn’t crowing about his company’s recent achievements. During a conference call with financial analysts, he was asked where the turnaround stands.

“Our everyday user continues to show improvement. Our business-to-business experience shows improvement,” he said. “So we think that as long as the economy continues or the higher end of the economy continues to do reasonably well, we will continue to track in that regard.”

I wouldn't bet against him.

Monday, August 1, 2011

Turnaround stars

The recent economic news has been grim, but there’s a conga line forming in the restaurant business. With the exception of P.F. Chang’s financial results, this has been a feel-good time for the trade.

Look at the results for three former flat-liners in what’s been christened the polished casual market. Ruth’s Chris was losing sales at the rate of more than $1 million per store. Last week it posted a comp increase of 5.8% for the second quarter.
Morton’s, an archrival, topped that achievement with an 8.3% increase.

And Kona Grill did even better, logging a 9.1% rise.

Meanwhile, Dunkin’ Donuts’ parent dazzled Wall Street with the industry’s most significant (and successful) IPO in years.
Ignite Restaurants, the parent of Joe’s Crab Shack and Brick House, surprised a lot of Wall Street watchers with the announcement that it’d filed for a $100-million offering.

It’s far too early to declare a return to good times, nor an escape from the bad. Recent days also brought the bankruptcy of Chicken Out, the D.C.-area takeout concept once hailed as an ideal acquisition candidate, and Elephant & Castle, the high-volume casual chain. A Chevys franchisee also had to seek protection because of several blood-sucking leases.

But it’s not premature to hail three industry leaders for their amazing turn-around efforts. Indeed, their recognition might be overdue.

I’d watched them like a vulture during the worst of times because I was convinced their concepts were headed to a liquidation auctioneer. A turnaround seemed like too much of a moon shot given where the brands were.

But I was proved wrong. So, with apologies, I’m paying homage to three turnaround stars, even if their charges still have a ways to go in their recoveries.

I’m breaking it into three installments for ease of consumption. Here’s the first.

Popeyes’ Cheryl Bachelder: Working a common-sense plan.

Before the world fell apart, the AFC Enterprises concept announced it was rebranding to play up its Louisiana heritage. The yawns from reporters and financial analysts must’ve been deafening. Hadn’t the chain proclaimed the same mission time after time?

The ho-hum factor wasn’t diminished by the comeback plan put forth by the incoming Bachelder: Embellish the brand’s appeal, improve stores, make them financially sound, and expand. You could’ve ripped that turnaround punchlist from a how-to book.

But the tactics were different, particularly for what Bachelder termed the brand-building “pillar.” Popeyes was a chicken-on-the-bone concept. That heritage would be underscored by the rebranding of the chicken as Bonafide, a clever way of saying it was true fried chicken, with a name that made you think “bone.”

The problem with it and other fried chicken brands was the limited appeal at lunch. You don’t want to get all greasy before heading back to work, or down a heavy mid-time meal before a sleep-inducing meeting. So a new array of sandwiches and wraps were added.

Similarly, you can’t munch a fried-chicken breast while steering with your other hand (trust me, I’ve tried it). Portability was a true shortcoming, particularly in generating more sales through the drive-thru. So Popeyes added nuggets, tenders and snack-sized minis.

Then there was the overriding concern about price. Chicken is relatively inexpensive, but the economy had tanked. If it wasn’t a bargain, consumers were going to walk away.

Popeyes countered with an array of new, low-cost and snackable selections.

Meanwhile, operations were scrutinized via a new service tracking system. Some of the resulting fixes were so basic as to merit a Do’h!: Clearer headsets at the drive-thru, so orders wouldn’t botched, and the installation of timers to keep everyone mindful of service speed.

It wasn’t a matter of splitting the atom. Any ops specialist preaches the better part of Bachelder’s strategy as standard operating procedure. The tactics were peculiar to Popeyes’ challenges and menu. But there wasn’t anything mind-blowing about the adjustments.

The key was the execution. Coming up with a plan is easy. Making it happen as planned is the challenge.
Bachelder did it. That leaves the key question of how.

Given how adeptly the plan was communicated and executed, there’s only one solution: A semester at Hogwarts. And maybe in the graduate program at that.