Survival tactics 2.0

Restaurant chains agree the economy stinks. But their ways of contending vary more than Sen. Burris’ recounts of his Blago dealings. Here’s a rundown of what several brands have recently identified as their updated coping strategies:

Applebee’s: The near-term emphasis, executives said during their conference call, will be on restaurant operations, both to bolster unit-level profit margins and to provide a better experience for the guest. One of the butt magnets to be used near-term is an updated menu sporting new types of foods and beverages, according to Julia Stewart, CEO of franchisor DineEquity Inc. The introduction is slated for mid-April, with more products to be introduced and promoted throughout the year, she said.

Cracker Barrel: Management spoke less during its conference call about speeding service, the focus of past confabs, and far more about delivering value. The chain is about to roll out a line of lunch and dinner skillet meals that will be priced from $7.99 to $8.99, including salad and bread. Executives acknowledged that their Best of the Barrel initiative, an effort to streamline the menu by loping off less-popular selections, proved a mistake. “Customers were disappointed to see their favorite food items no longer available,” said CEO Michael Woodhouse. It was a lesson, he said, “we learned the hard way.” No mention was made of an initiative to speed service by using holding equipment for items like bacon and sausage.

Domino’s: “We’re working very hard to be a bigger player in the late night business, particularly with some of our new products,” said CEO David Brandon. He asserted that the pizza chain’s initiative for stretching its sales day the other way, into lunch, has been successful. All stores are now open for the meal, which Domino’s is pursuing with its new line of delivered oven-baked sandwiches.

Famous Dave’s: The emphasis appears to be on helping franchisees survive the downturn. The assistance includes a switch to shorter-term purchasing contracts and the development of more secondary suppliers, to increase competition. Meanwhile, development requirements for franchisees have been suspended through 2010. Licensees that open a store get a cut in royalties for the first year of operation. Advertising royalties have been halved, to .5% of sales.

Texas Roadhouse: Management stressed this week that traffic and guest spending levels are the big problems confronting the bargain-priced chain. Longer term, said CEO G.J. Hart, the company is focusing on the cost of new restaurants. Hart said the home office hopes to bring down the current outlay of $4.1 million, or roughly what the unit will do in annual sales, in part by locating stores in strip malls. “We’re also evaluating conversions,” he said.

A sign of the times

This morning the parent of Applebee’s and IHOP posted a net loss of $137 million for the last three months of 2008, the result of having to reset the value of Applebee’s “goodwill,” or the worth of its name and other intangible assets. In other words, DineEquity Inc. determined the brand equity of the company it bought in 2007 for $2.3 billion is worth about $148 million less today. That left shareholders with a loss of $8.15 for every share they hold.

Yet DineEquity’s stock price has climbed about 20% so far today because the company would’ve posted a profit without the write-down—of roughly $5.7 million. That’s for a company that franchises nearly 1,400 full-service restaurants.

That kind of a week

Some weeks you might as well use a reporter’s notebook to level wobbly restaurant tables. The industry just isn’t making any news.

This, clearly, is not one of them.

Before Day One was officially two hours old, we already had McDonald’s posting another Ripley’s-caliber financial result (domestic comps rising 5.4% in January, a month regarded by most restaurant-chain execs as a possible violation of the Geneva Convention); Starbucks’ unveiling of new breakfast bargains; Domino’s launch of a new ad campaign that humorously riffs on the economic stimulus package and the formation of a new White House cabinet; and Applebee’s getting hit with bad news that few could have imagined (it's not meeting the thresholds needed to maintain its 90% tax abatement on the office it kept in Kansas after being sold to DineEquity in California).

This is also the week KFC is scheduled to introduce its value menu, which will almost certainly be backed by a huge marketing push.

More definitely to follow. Buckle your seatbelts.

Michael Dell proxy gets say in Applebee's management

Insiders have been saying for months that Michael Dell of Dell Computer fame has been closely scrutinizing Applebee's and the operation of its parent, DineEquity. Those parties say Dell has become interested in the restaurant business, and in a turnaround of Applebee's in particular.

But the only outward sign had been the announcement in December that Southeastern Asset Management, an equity company affiliated with Longleaf Partners Fund, was planning to take an active role in the management of DineEquity, in which it holds a significant stake. Dell was an investor in various funds affiliated with Longleaf, which in turn has held a significant number of shares in Dell Computer.

SAM is reportedly DineEquity's largest shareholder. Michael Dell is the second largest.

Now Dell's interest is out in the open. DineEquity announced today that it has appointed Howard M. Berk to its board of directors. Berk is a partner in MSD Capital LP, a fund that manages the wealth of Michael Dell--the MSD of MSD Capital--and his family.

Julia Stewart, meet Michael Dell. And that's not a Mac your using, is it?

DineEquity franchises IHOP as well as Applebee's.

Reading the ink blots of recent developments

Here's a blog entry I posted on Fohboh, a social network for members of the restaurant industry (Fohboh stands for front of the house/back of the house):

I seem to be out of sync with fellow Fohboh-ers on an issue that threads its way through many of the blogs and discussions here. Try as I might to catch the economic optimism shown by my community mates, the gauges I’m reading on the industry’s near-term prospects tend to fluctuate between sobering and scary. But read on, because this is actually a positive post.

First, the harsh realities. Consider some of the this week’s news stories.

DineEquity, the parent of Applebee’s and IHOP, announced that it’ll suspend dividends for the foreseeable future to pay down the debt weighing profoundly on the company. Indeed, the industrial-sized IOU is proving more of a burden than anticipated. DineEquity planned to pay back what it borrowed to buy Applebee’s by selling company Applebee’s units to franchisees. But the licensees can’t get their hands on capital in the current credit freeze. There really hasn’t been a Plan B.

The news about dividends followed last week’s revelation that a big and powerful DineEquity shareholder, Southeastern Asset Management, is planning to take a hand in the company’s operation. Surprisingly, the coverage provided little information about SAM, which is actually an investment vehicle for a larger financial concern, Longleaf Partners Funds, which in turn is headed by a junior Warren Buffett named Mason Hawkins. Longleaf has or held significant investments in such other restaurant companies as Yum! Brands, Marrriott, and Wendy’s/Arby’s, and was a major shareholder of Dell Computer.

Hawkins, a guy who could pick up the tab if he lunched with Buffett or Bill Gates, is regarded as a very astute guy. And the investors in his funds include such business titans as Michael Dell, he of Dell Computer fame. Indeed, some insiders say Michael Dell has taken more than a passive interest in the workings of Applebee’s. The business has apparently piqued his curiosity.

Which brings us to some of the positives. Yeah, suspending dividends is an extraordinary move. But the action megaphones the message that DineEquity isn’t operating under a passive, business-as-usual mindset. And if it should lapse into inertia, investors who view it as a potential prize will ensure any lethargy is shaken off pronto. And they’ve shown that they know how to right or run a business. A kingpin of casual may soon be revived, which could help in elevating that whole wheezing sector.

There’s still plenty of bad news seeping out of that segment. On Tuesday, for instance, the private equity company that owns the Del Frisco and Sullivan’s steakhouse chains quietly shelved its plan to sell the operation through an initial public stock offering. The significance extends beyond Del Frisco, since the private-equity buying binge of 2005 and ’06 has left many private companies with restaurant companies they planned to spin off in a year or two. What are they going to do with those strained assets if individual buyers can’t get the financing, and the stock market is providing an unfeasible option? And while they’re waiting for conditions to improve, the private-equity firms have to run their holdings. They’d likely admit they’re asset portfolio managers, not restaurant operators.

Yet here’s some positive news: A financial analyst said he was told by Brinker Internatiional executives that the casual-dining giant still expects to sell its Romano’s Macaroni Grill chain by Jan. 1. Somewhere out there is enough financing to fund the $131.5-million deal.

The bad news: Brinker said it will cut 40 more headquarters positions, according to a Dallas news report.

And the even worse news: The company still faces a credit review by Moody’s, the debt-rating service, that could spell trouble for the company.

So I’m puzzled by the sunny perspective of others within the community. Sure, it’s not time to crawl out on the ledge. But these are extraordinarily dire conditions—hands-down the worst I’ve seen in 24 years of covering the business.

Nonetheless, I’m going to leave you with a positive recent story that virtually slipped by the industry: Ruby’s Diner, the well-regarded diner concept on the West Coast, broke the industry’s long-running hiatus from launching new concepts. The chain fired up the grills this week for a new, upscale venture called Ruby’s MotoDiner, whose checks are likely to top the typical tab at its parent concept by 20 percent, according to blogger extraordinaire Nancy Luna.

You don’t launch a new concept if Armageddon is ‘round the corner. Why bother having the menus printed?

But between now and the first bar of “Happy Times are Here Again,” we’ve got some tough slogging.