Chipotle speaks

When Chipotle executives speak, other restaurateurs snap their heads to listen. Here to save them a little neck strain are the pearls from management’s conference call Wednesday with Chipotle investors:

Co-CEO Steve Ells, on the first ShopHouse Southeast Asian Kitchen:

While we're still working to perfect the concept, it reminds me very much of the first Chipotle when it originally opened. Many current customers aren't quite sure how the system works or what to order when they first come in and sometimes have issues with flavor combinations or the level of spice in their food. But they like it and from the very beginning, you see that the customers are coming back, week after week.

Ells, on Obamacare:

We, today, have a limited insurance program that we offer our crew. Most of our crew chose not to pick that up. And so we would go from very few of our crew being involved in the voluntary program to us being required to provide insurance to all of our employees. So it would be pretty significant change to our business

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Co-CEO Monty Moran, on Chipotle’s Restaurateur management development program (where managers get a big bonus for hiring employees who then become managers):

This GM taught all of us a lesson: She came from a Restaurateur store herself and had a strong vision for what a winning team looked like. Weeks before her new store opened, she spent days on the sidewalk in front of her new restaurant, interviewing candidates for crew positions…Once she had selected her team, she trained each of them in an existing Chipotle and then invited all of them to her apartment to explain to them her vision for her restaurant and to watch videos from the 2010 All Managers Conference to be sure that each of these people understood Chipotle's unique culture. She made a commitment to each of them to help them grow and carefully described exactly how they would be able to become managers and future leaders at Chipotle themselves. At the same time, she secured a commitment from each of them to devote themselves fully to becoming part of the Restaurateur store very quickly.

Moran, on seasonal changes in traffic:

Our peak hour transactions are sort of more in the 100 range during the winter months. And during the summer months, it's historically gotten up sort of more in that 110 to 115 range…Obviously, with this coming spring and summer season, we hope to set some new records in those areas because of our new emphasis

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Ells, on menu development:

One of the reasons that we continue to grow so strongly is because we continue to improve our core offerings, which is what people come for. We have experimented here and there with a new menu item. We've tried soup. We've tried chili. We've tried smaller menu items, single taco, things like this. But it seems that people keep coming back for their chicken burrito or their barbacoa tacos or whatever it is that they've landed on.

Bonus tidbit:

Brown rice, one of the chain's most recent menu additions, now accounts for about a third of all rice served by the chain.

Is P.F. Chang's smarter than Chipotle?

Place your bets and get out of the way. We’re about to see who’s nailed the right future for an Asian restaurant chain, Chipotle or P.F Chang’s.

Unless you’ve been really, really preoccupied with Herman Cain’s political complications, you’re probably aware that Chipotle intends to launch a chain of fast-casual restaurants featuring authentically flavored Asian fare. Management hasn’t shared much information about the early performance of ShopHouse Southeast Asian Kitchen, which borrows Chipotle’s serving-line format. But founder Steve Ells has commented that patrons have complained about the spiciness of the food, much as customers did when Chipotle started. He’s proudly cited that pushback as proof the concept is positioned where few ethnic chains have dared American taste buds to follow.

Contrast that push-the-margins approach with the new direction P.F. Chang’s is exploring. The company announced that it’s opening a test lab of sorts today to try the recipes, design features and other elements that will likely figure into its namesake concept’s future. It’s “what we hope to become over the next five to 10 years,” said chain president Lane Cardwell.

Currently under test are seven entrees available only at the new southern California outpost. There’s a roast chicken served with shoestring fries, jazzed up with a Sichuan rub and other Asian touches (the fries are tossed with “crispy sesame,” for instance). But it still sounds a lot like roast chicken and fries, just with a little more spice.

There’s also a steak frites, served with fries, and a double-cut pork chop, which is fast becoming a casual-dining staple.
You can also get Alaskan black cod, Scottish salmon or Alaskan halibut, all served in one grilled entrée. Here again, the spices are Asian, but the foundation of the dish hails from elsewhere in the world.

Indeed, it sounds like Chang’s is trying a more mainstream American approach, perhaps to counter a traffic drop-off that’s been steeper than the slowdown for many grill-and-bar-type competitors. The change in strategy is surprising because Chang’s has always been a bit of a niche player, with a menu that goes far beyond what you'd find in your order-by-number neighborhood Asian joint.

The directional adjustment--and remember, it's still under test--may prove to be a smart strategy. It's just contrary to the body of 2012 prognostications, which almost unanimously foresaw exploration of unfamiliar ethnic dishes and flavors.

Then again, Chipotle might have the better idea. Or maybe authenticity works in the fast-casual market, but not in the full-service arena.

Whatever happens, it’s one of the most marked recent examples of chains moving in directly opposite directions.

Myth busting

A confused figment of my imagination writes, “Hey, Restaurant Reality Check, how am I supposed to tell fact from fiction in the age of The Onion, the Borowitz Report and KFC’s publicity department? Some of their made-up restaurant stories sound more believable than the real thing. How can a non-cynic know when he’s being fed a whopper?” (signed, Believing It—Or Not?)

Dear Believing,
I was discussing the very thing yesterday with Henry Kissinger and the Fonz. You just can’t tell these days who’s pulling your leg and who’s merely covering the Republican presidential candidates.

Fortunately for you and your confused peers, Restaurant Reality Check can recount how a few persistent myths were disproved, decidedly, by recent industry developments.

Wall Street firms have a hammerlock on executive compensation outrages. A Friendly source—note the capital “F”—blew that one away. In case you missed reports in mainstream media like The Wall Street Journal and The Huffington Post, the restaurant industry has its own instance of a CEO enjoying big-dollar privileges while the corporate rank-and-file burn their pink slips for warmth.

According to the reports, Friendly’s CEO Harsha Agadi billed the company for $234,000 in day-to-day expenses in the year preceding the restaurant franchisor’s recent bankruptcy filing. The charges didn’t include the $190,000 Agadi submitted for relocation.

The contrast with the plight of Friendly’s workers is what made the story a hot one. More than 600 lost their jobs when some 60 stores closed.

We can also refute at this time that the Fribble lobby has secured a federal bailout for the family chain.

E-mail is killing letter writing. Not in the restaurant business. Hundreds of stationers could pop for a second home this year because of the business they’re reaping from disgruntled shareholders and the chains they’ve targeted for takeover.

This morning, for instance, Cracker Barrel shareholders were sent a letter from CEO Sandy Cochran, spelling out why they should rebuff Sardar Biglari in his attempts to wrest control of the family chain from current management. She countered Biglari’s assertions by explaining the chain’s business-building strategies, point by point.

The communication was in response to an 11-page letter that Biglari sent last week to the same recipients. Taken together, the two missives might have made Cracker Barrel’s shareholders the most informed in the business.

But that’s not the only volley of letters helping the Postal Service. Cosi and Brad Blum, the Olive Garden alumnus who wants to run the fast-casual chain, have stamp dispensers churning as well.

Ditto for the CEO-turned-advisor of Wendy’s, Roland Smith. Recent SEC filings include Smith’s resignation letter, which in turn referenced other missives during the summer. The communications indicate that Smith stepped down because he didn’t want to leave Atlanta, where the chain is currently headquartered. It’s moving back to the suburb of Columbus, Ohio, where it was founded.

Smith has been succeeded as CEO by Emil Brolick, who’s collecting $1.1 million in salary, with the opportunity to earn another $1.6 as a bonus. Smith was in the same ballpark.

Survival has supplanted concept development. According to the conventional wisdom, restaurant companies are too preoccupied with survival to consider the development of new concepts.

Not any more.

The last two weeks brought announcements of new concepts from such celebrated operators as Starbucks (Evolution Fresh Juices), P.F. Chang’s (Pei Wei Asian Market, which of course has nothing to do with Chipotle’s launch of ShopHouse Southeast Asian Market), IHOP (IHOP Express) and Jamba Juice (JambaGo, the juice chain’s riff on an express format).

Okay, enough myth busting for now. In our next installment, we’ll take on Yeti and the promises of restaurant unions.

Forget Twitter. Chipotle scores big with foil.

Social media may be the new frontier in restaurant marketing, but Chipotle Mexican Grill said it did just fine this summer with nothing more than some gold foil.

The industry’s non-conformist chain decided to call attention to its push for better ingredients by wrapping the concept’s torpedo-sized burritos in gold instead of the usual silver foil, which has figured into billboard campaigns in the past. The notion was subtle, to say the least. The gold standard—get it?

Well, people did. Executives revealed to investors yesterday that 94 percent of customers who saw the gold foil understood the implication that Chipotle uses better ingredients, strongly reinforcing the chain’s Food with Integrity pledge. Research also indicates that the campaign boosted awareness of Chipotle by 19 percent, said Steve Ells.

Unconventional marketing is being used more frequently by the burrito maker. Ells noted that an animated short movie illustrating the comeback of small-scale farming is currently being shown in 10,000 theaters, where some 20 million people will view it. It was funded by Chipotle as a way of calling attention to better agricultural methods.

It’s already been viewed more than 1.7 million times on YouTube, Ells said.

He noted that a message about sustainable farming was delivered about 32 million times through coverage of Cultivate Chicago, a recent food and music festival sponsored by Chipotle in the Windy City. The event drew some 16,000, who came to sample the specialties of big name chefs, hear some big-name bands, and maybe learn about sustainable farming in the process.

“We've always believed that if people discover where their food comes from, the more they'll appreciate what we do at Chipotle,” Ells told investors during a conference call.

Ells said that a second Cultivate festival will be held next year, most likely in the chain’s headquarters city of Denver.
Not on the schedule, he noted, is the development of a second ShopHouse Southeast Asian Grill. The company plans to focus on fine-tuning the prototype, which opened a few weeks ago in Washington, D.C.

Ells disclosed that patrons of the first ShopHouse have complained about the spiciness of the food. Those were the same sort of comments that he heard when the first Chipotle opened, Ells said.

A-ha's that might've slipped past you

You can’t miss a wave that’s reshaping the restaurant business. Harder to spot are the ripples that could swell into powerful forces. Consider these recent developments, for instance:

‘Menu disclosure’ is redefined. The term was once synonymous with posting calorie counts and other nutritional metrics so consumers could make an informed choice. Now we’re seeing a secondary designation.

Amid all the hoopla over the opening of Chipotle’s ShopHouse Southeast Asian Kitchen was a little-noticed detail brought to light by the Washington Post: Not everything on the menu was what it purported to be. Two of the sauces for vegetarian were actually made with fish stock, a huge no-no to the more orthodox non-flesh-eaters.

As the Post subsequently reported, ShopHouse quickly rectified the situation by adding an asterisk to the menu listings, alerting customers that the sauces are non-vegetarian.

It must’ve been déjà vu all over again for the concept’s parent. About a week beforehand, a tweeter with a large following voiced 140 characters’ worth of indignation that Chipotle’s pinto beans were flavored with bacon. Co-CEO Steve Ells called the tweeter (he’s an editor of Maxim, the breasts-and-beer magazine), apologized, and explained that the menu description had been corrected.

Meanwhile, Wendy’s drew fire because of its switch to buttered hamburger buns for the new Dave’s Hot ‘n Juicy line. Websites pointed out that the butter could be a hazard to consumers who are allergic to dairy products, and faulted the chain for not flagging the newfound danger more clearly on its website.

Franchisors could be seriously ding’d by the tax man. It slipped past almost unnoticed, but KFC lost a landmark court decision this week that should worry every franchisor. The U.S. Supreme Court rebuffed an attempt by the Yum! Brans holding to keep Iowa from assessing it for state income taxes.

The franchisor pointed out that it doesn’t operate a single restaurant in the state; all the units there are franchise stores. It doesn’t even have a single employee.

But the Supreme Court rejected the appeal. KFC will have to pay the $250,000 that Iowa says it’s due in income taxes on the franchise royalties and fees that were channeled to chain headquarters in Kentucky.

Two days, two bankruptcies of Sun Capital holdings. Are economic realities catching up to the private-equity raiders?
No PE investor gobbled up as many restaurant brands before and during the Great Recession as Sun, whose portfolio extends from Captain D’s to Bar Louie. The acquisitions included stakes in Friendly’s and Real Mex, parent of the Chevys, El Torito and Acapulco chains, both of which are now being run under the scrutiny of a bankruptcy court. Sun is undoubtedly the owner of more concepts than any other entity in the business, and is likely one of the bigger operator-franchisors as well.

It’s become an industry parlor game to speculate about what Sun will do with those holdings. An IPO for a select chain? Or for several, packaged together? How about a sale to other PE companies? Or to a strategic buyer? Maybe some will be crunched up and sold piecemeal for their locations, the way an auto is sold for parts.

It’s safe to say that Sun didn’t buy anything with a hope of seeing it go bankrupt. What does that portend a company with that much vulnerability to a restaurant downturn on its books?

Looks as if the parlor game has just been updated.

Finally! A list of the most common restaurant office sounds

There’s no shortage of rankings in the restaurant business, as you’ll discover when the October issue of Restaurant Business arrives (you can also view it via our free app from iTunes.) As we report, at least five new listings of the best and most loved restaurant chains were released toward the end of summer—revealing that the industry has no fewer than four “best” chains (add a fifth if you believe one of our competitor’s rankings, which appeared too late to be included in our print round-up.)

There’s none of that confusion in the roster that’s been conspicuously overlooked in the recent fit of ranking, listing and arraying. Damn the politics!

Here, plugging the gap at long last, is the Loudest Sounds Heard This Summer from Chain Headquarters:

'Hmmm.' The industry has been agog over the debut of Chipotle’s ShopHouse Southeast Asian fast-casual concept. But cooler heads have remembered that Chipotle isn’t the first celebrated restaurant operation to fire up the wok. Cheesecake Factory similarly quickened pulses when it unveiled RockSugar Pan Asian Kitchen, and Ruby Tuesday tried unsuccessfully to keep the buzz down about its purchase of the Wok Hay fast-casual concept a few years ago. Neither of those have stunned the industry. Indeed, officials of both the casual dining chains say the ventures are still in the evaluation phase, and Ruby has transformed Wok Hay into something much different from what it bought.

Factor in the evident challenges of Pei Wei Asian Diner, P.F. Chang’s fast-casual sister, and you have several counterbalances to the ShopHouse hoopla. Of course, the whole MP3 phenomenon failed to boom until the iPod hit the market. But the breathless betters on ShopHouse’s success should at least splash some cold water on their faces and remember history.

‘Kill our signature’ When you’re known for your burger, it’s pretty dicey to mess with the recipe. Wendy’s says that’s why it spent four years on the development of the new Dave’s Hot ‘n Juicy. Former CEO Roland Smith boasted that it’s better than anything you’ll get from In-N-Out or Five Guys (both of which appeared atop several of the Best lists.)

But the burger chain is hardly the only quick-service brand to mess with its signature. Witness Domino’s launch of artisan pizzas, which are specialized versions of the new pizza the chain added about a year and a half ago.

But the list goes on from there. Sonic revamped its Coney, a signature of the quirky chain. Burger King is messing with “stuffed burgers,” while Carl’s Jr. and Hardee’s give “steakburgers” a try.

The one constant: All of the new items promise a considerable jump in quality, a reflection of the new mantra that value today means far better quality at a not-much-higher price.

‘I don’t care if sushi’s our specialty. Give me a burger!’ This is a really bad time to be a cow. Just when you think the upscale burger market has crested, along comes news of more big-name entrants, like Domino’s founder Tom Monaghan, or popular retail brands like Bubba Burger.

If the brand can’t do a true burger, it tries a similar product, like the steak sandwich at Panera Bread, or the countless cheeseburger pizzas that are now available.

Is it just me, or have the Chick-fil-A cows looked a little more nervous as of late?

‘Get me a headhunter! And keep them from calling the team!’ The restaurant industry has always been a continual game of musical chairs. When sales or profits sag and the music stops, a scramble erupts for new CEOs, ops specialists or marketing hotshots, which seem to be in greater than usual demand this year. Clearly we’re in the midst of that right now. Consider the recent changes: New CEOs or presidents at Wendy’s, Hooter’s, California Pizza Kitchen, Church’s, O’Charley’s, Texas Roadhouse, with a vacancy at Dunkin’ Brands’ international arm.

With industry veteran Brad Blum using his substantial stake in Cosi to demand the top job there, we might also add that situation to the tally.

Marketer changes include the departure of Dairy Queen’s chief brand officer, Michael Keller; the addition of Pepsico veteran Scott McDaniel to CEC, the parent of the Chuck E. Cheese’s chain; and the recruitment of Garfield the cartoon cat to serve as the new mascot of Straw Hat Pizza, the 53-year-old regional chain.

There are a number of executive placement services that work only within the restaurant industry. It’s a shame that they’re not publicly traded, or they’d bump Chipotle and McDonald’s as the hot foodservice stocks.