'Attention, Central Casting'

We’ve decided to recount the week’s restaurant-related developments in cinematic form. So heads up, Casting. Here’re the players we’ll need to play the central characters.

Grab a guy in whites and put him in a serious suit. Yesterday’s announcement of a new president for the La Madeleine bakery-café chain probably took no one by surprise. Phil Costner, as COO, was the heir apparent. Still, his appointment is remarkable, especially for industry professionals who make their living in a kitchen. As far as we know, he’s the only chain president to reach that perch through menu R&D, and he’s one of the few chefs to head a system of significant size (Steve Ells of Chipotle and Kerry Kramp of Sizzler being the others).

Put Sigourney Weaver in a Cracker Barrel cap… As tough as she was in “Alien,” the veteran actress will have to show more fortitude in her depiction of Sandra Cochran, the new CEO of the family restaurant chain. On Day Two of the job, Cochran had to contend with a demand by shareholder and takeover artist Sardar Biglari that he be ceded a seat on Cracker Barrel’s board. The demand was put forth on a website created by Biglari to blast the chain’s direction and management. And then, just to add the icing on the cake, Cracker Barrel reported a 36% decline in quarterly net income. You have to wonder if prior CEO Michael Woodhouse called to provide moral support—the Bishop to Weaver’s Ridley.

…And get me one of The Borg guys from “Star Trek” to play Biglari. “You shall be assimilated. Resistance is futile.” The thirtysomething activist shareholder followed the same plan he’s pursuing at Cracker Barrel to wrest control of Steak ‘n Shake and Western Sizzlin’. Clearly he intends to prevail similarly at Cracker Barrel, his most mainstream target to date.

Who’s today’s Jimmy Stewart? Whoever he is, get him to play Craig Meier, the CEO of the Frisch’s family restaurant chain, which also operates a number of Golden Corral franchisees. The company’s sales dropped 4.6%, so Meier took a 26% pay cut. Clearly this guy couldn’t work on Wall Street without being some suit’s bitch. The cut brought his pay down to about $700,000—for overseeing a company that brought in $303 million. Take that, Gordon Gekko.

Okay, who’d be a good Lazarus? See if you can make him look like Craig Nickoloff, the founder of the Claim Jumper chain. Nickoloff sold the chain, second only to Cheesecake Factory in average unit volumes, to private-equity concerns that watched sales drop and drop and drop. Eventually, Claim Jumper went bankrupt and was bought at a bargain rate by Landry Restaurants’ Tillman Fertitta. Nickoloff had it made. But of instead of working up a sweat on a golf course, he just teamed up with the celebrated chef Michael Cimaruti to buy Silver Spoon, a wheezing landmark of the Los Angeles dining scene. They’ve indicated that the West Hollywood outlet will be converted into a restaurant called Connie and Ted’s, but haven’t yet revealed what the new concept will be like.

Okay, time to sketch out the storyboards….

Is Biglari making a run on Denny's?

Two investors in Denny's Corp. announced this morning that they're seeking three seats on the restaurant company's board because of dissatisfaction with the chain's direction and management. If their proxy challenge is successful, we may see the boldest takeover attempt yet by Sardar Biglari, the crafty and intriguing thirtysomething who has set out to build a restaurant empire.

Adding Denny's to his fold, or even attempting it, would be a moonshot compared with Sardari's previous efforts to become the Warren Buffett of the restaurant business. The pillars of his holding company right now are Western Sizzlin, a fairly sleepy steak-and-buffet chain in the Southeast, and Steak N Shake, the retro burger-and-shakes concept he's aggressively trying to turn around, with noticeable success.

Right now, he's ostensibly not involved in the effort to force a change in Denny's board--and, by implication, its management. But one of the gambit's principals is Jonathan Dash, identified as a director of Western Sizzlin and an advisor to the chairman and CEO of Steak n Shake. That'd be Mr. Biglari, folks.

Dash is joined in the quest for board seats by David Makula, the founder of Oak Street Capital Management investment firm, and Patrick Arbor, a futures trading veteran. They and the parties they represent claim to hold a 6.5% stake in Denny's.

Biglari wasn't mentioned by name, just inference.

In announcing their board bids, the challengers commented, "The weaknesses of Denny's management have forced us to seek changes to the board in the interest of all shareholders. If the status quo is maintained, we are deeply concerned that the Company's future will mirror its past. " The announcement proceeds to spell out what should be done to shake the brand out of its purported inertia.

It's deja vu all over again for those who remember the statements Biglari issued before beginning his successful takeover of Steak n Shake. The precise words may be different, but the assertions are nearly identical.

Steak n Shake's parent company, by the way, is changing its name to Biglari Holdings Inc.

Stay tuned for this one.

Shareholders as mystery shoppers

I recently moderated a webinar where the participants cited the need for new ways of gauging customers’ service experiences. The prevailing method, of inviting patrons to take an online or telephone survey in exchange for a freebie, has apparently lost its impact, though they did not explain why. Instead, they suggested there has to be a more effective way of soliciting input, using new technology or at least fresher techniques.

Sardar Biglari, the activist investor who took over Steak n Shake’s corner office last year, told investors yesterday of a feedback mechanism he’s put in place to short-circuit the process between guest experiences and a restaurant’s better financial performance.

The mechanism also fits his self-avowed cheapness. “We are demons on costs,” he proudly told stockholders in a letter posted on Steak n Shake’s corporate website. “Trimming them is
now embedded in our corporate DNA.”

The system he’s set up in effect turns Steak n Shake’s thousands of stockholders into mystery shoppers. As Biglari explained in his letter to those investors, the family restaurant chain set up an e-mail hotline a year ago, owner@steaknshake.com, so any stockholder could recount their experiences in a unit to the home office.

If they spotted something good or bad, executives will take note, Biglari stressed. You can be assured that each message is read, and when necessary the Steak n Shake team is dispatched quickly to remediate any problems,” he said.

In addition to fixing problems before they can fester, the arrangement demonstrates that headquarters will be accountable to the company’s owners, even over such things as the cleanliness of the silverware.

So far, Biglari indicated, the system has been a success: “The email, which goes to all members of the restaurant operation’s senior leadership team, has been both effective and cheap — in line with our motto.”

To keep the system from being commandeered by suppliers trying to flog a product, Biglari has set some stern ground rules: Do it once and you'll be assured of never doing business with Steak n Shake.

Any other non-stockholder who uses the e-mail address will be boiled in oil. Okay, I made that up. But I don't think the response from headquarters will have its i's dotted with little hearts or flowers.

Biglari recently surpassed Nelson Peltz as the gadfly most likely to be covered by Restaurant Reality Check. His prescriptions for reviving a restaurant company, and most definitely his means of putting them forward, are hardly cookbook, as his feedback mechanism and shareholder letter readily attest.

But it’s hard to argue with his approach, given the results. When Biglari assumed control of Steak n Shake, the company was losing money at the rate of $100,000 a day, he told shareholders. For its most recently completed quarter, the concern posted a net profit of $3.4 million, compared with a net loss a year ago of $9.2 million.

The bounce back was even more dramatic on an annual basis. Steak n Shake enjoyed a profit for the fiscal year of $6 million, compared with a loss the year beforehand of $23 million.

Granted, the most recent fiscal year encompassed 53 weeks instead of 52. Still, same-store sales during the fourth quarter leapt 10% on a 20% quantum leap in traffic.

Biglari might ruffle some feathers, but he’s delivering to Steak n Shake’s shareholders, employees and guests.

A situation to watch, Part I

So many jaw-dropping situations, so little time.

During this extraordinary period for the restaurant industry, you can get a research-worthy case of whiplash from trying to watch all the dramas unfolding in the business. Instead of rubberizing your neck, consider a focus on this standout among the nail biters. Its only rival as a potential tell-all book is the other situation that's not to be missed, detailed in Part II below.

Steak 'n Shake 'n Biglari, or What Would Warren Do?
If Warren Buffett asked business bravehearts who should succeed him as Holding Company Guru, Sardar Biglari would be the guy jumping up and down with his hand in the air, yelling, “Me! Me! Pick me!!”

Instead, Biglari has set out to prove himself the de facto heir to the Bard of Omaha. Buffett became the second richest man in America in large part by spotting repairman’s specials that were undervalued. He gathered them into what’s now Berkshire Hathaway, a holding company he turned into a cash-flow machine by adding insurance companies to the portfolio.

Biglari, a thirtysomething business school grad who has cast a former professor as his Charlie Munger, is apparently trying to follow Buffett’s blueprint to a T-square. First he bought the wheezing Western Sizzlin buffet chain, then turned around and amassed a major stake in Steak 'n Shake, a burgers-and-fries chain with the distinction of offering table service. His investment allowed him to wrest control of Steak 'n Shake from a management team that was likely drawing death threats from investorsecs.

Amazingly, Biglari has been able to bring his two flagging operations together without being lynched by those investors, probably because they welcomed any change in leadership. Among the reasoned objections they might have posed was how a company could turn around both brands simultaneously, when reviving just one of the flatliners would be a Harvard Business case study.

Then again, hasn’t Buffett done that time and again?

Even more of a parallel was Biglari’s use of Steak 'n Shake Holdings to buy about a 10% interest in—surprise, surprise—an insurance company, Fremont Michigan InsuraCorp.

You can read all about Biglari’s efforts when he releases an extended and likely candid letter to investors next week. It’s exactly what Buffett does every year in his legendary reports to Berkshire’s shareholders.

The key question to keep in mind as you munch some popcorn and watch this CNBC saga unfold: Has Biglari actually duplicated Buffett’s magic formula, or is he merely reciting a spell without the mojo to make it work? Is he really going to conjure the money?

Random thoughts I

Courtesy of some pinot noir, here are some random jottings about the restaurant industry as it laps the start of the ongoing economic meltdown.

Earlier this week I moderated an online brainstorming session, telecast as a webinar, on how restaurant chains can contend with the times. Among the nuggets of information:

• Some restaurant operators, perhaps for the first time in their careers, are contending with the frustration of putting their very blood into operations and still failing to goose sales. It’s demoralizing, observed Kat Cole, VP of HR for Hooters, but macro-economics can trump the best efforts. Indeed, she noted, many in the business are working harder than they ever have before. She encouraged our audience to focus on successes within their organization and their own four walls, and to keep employees motivated by providing plenty of recognition.


• The restaurant industry’s equivalent of hell is operating in Michigan, several speakers suggested. They cited that market as the epitome of an economy turned glacier-cold.


• Social media has arrived as a recruitment tool, a way of conversing with guests, and a means of communicating with employees and field-level managers.


• The times have ushered a collaborative, open management style into chain headquarters. Several speakers noted how essential it is to have all stakeholders apprised of what’s happening in the business and how it should adapt to conditions. Steve Grover, vice president of cost and product management for Steak n’ Shake, said he has regular meetings with the VPs of various departments to discuss what they’re doing and what results they’re getting. Hooter’s Cole says she confers with her counterpart in operations about every 10 minutes.

You’ll soon be able to hear the whole webinar—the Smart Business Decisions Roundtable—for yourself via the website of the presenter, Nation’s Restaurant News. It was sponsored by Kronos, which is also presenting two similar thinktanks in the near future. A panel discussion focusing on human resources will be held on Nov. 5. The spotlight turns to finance and IT on Dec. 3.

I'm moderating all three. In line with the FTC's new disclosure regulations, I'm obliged to let you know that I'm getting paid for shouldering that task. But I would've posted these observations even if I was just a civilian listener.

Ripple or the real thing?

Every trend starts with a single proponent and builds from there, adapter by adapter. Unfortunately, the process is no different for fads and flashes. The challenge for opportunity-spotters is distinguishing between the two. What, for instance, are we to make of these recent ripples in the market?

The Amway marketing approach: T.G.I. Friday’s broke a campaign in late July called BYOB, or Bring Your Own Buddy. Recruit a pal to join you at the granddaddy of casual dining and they’ll each get $5 off their meal. Apparently you can steal one of their fries, or just bask in the glow of having done something nice for a friend.

It would’ve been nothing more than a one-off for the industry is Arby’s hadn’t begun a campaign this month called Friends and Family Feast. If a group of five visits a unit together, they get five roast beef sandwiches for $5, and all sides for a mere $1 each. The more, the thriftier.

As Wendy’s/Arby’s CEO Roland Smith explained, the program is intended to bolster frequency, apparently through peer pressure. The chain has qualified 50% of its patrons as “medium users” who might be coaxed to add another trip here or there. Getting them to visit just one more time a year can boost a store’s comp sales by 3%, according to Smith.

So is this patron-as-guest-recruiter approach a trend or a fad? My projection: It’ll be another marketing tactic, another arrow in the quiver that’s put in play from time to time because of its novelty. So my final answer: Neither.

New product mania: Back in the spring, Quiznos CEO Rick Schaden sent a scooter to every headquarters staffer, explaining that they had to move faster in adapting to market trends. He cited product development as an area of focus, but left unaddressed the matter of how.

Yesterday, Schaden detailed the process for making that happen. Or so he attests. It’s called Flex Plan, and it aims to match new items to patrons’ financial situation. “The key is to provide the right food at the right time for the right price,” he said.

If times are tough, Schaden explained, the chain’s R&D department will churn out bargain items like the $3 Toasty Bullet or $4 Toasty Torpedo. And when better times return, he continued, the focus will shift to indulgence items, like double-meat sandwiches.

And regardless of what’s coming down the pipeline, he says, the set-up will streamline the process, yielding fast, more efficient introductions.

While that system is being adopted chainwide, Wendy’s is already reaping the benefits from an R&D overhaul, according to CEO Smith. The chain has “developed a very strong new product pipeline,” he assured investors. “By the end of the year we will have tested at least 14 new products, which is more than Wendy’s has tested in a single year in quite a long time.”

Then there’s the hyperactivity of chains like Mimi’s, Carl’s Jr./Hardee’s, Jack in the Box, McDonald’s and Burger King. New products are flying into the market like a pack of third-graders being released for recess. Is this heightened R&D activity a wave that’ll be with us for awhile? You betcha. Definitely a trend.

Commence the shopping spree: In what should have been a routine earnings release, The Steak n Shake Co. revealed yesterday that it’s restructured itself into a holding company with assets consisting of a lone restaurant chain, the Steak ‘n’ Shake retro brand. Why a holding company with one business?

“The company may pursue investments in the form of acquisitions, joint ventures, and partnerships either related or unrelated to its ongoing business activities,” explained a passage of the earnings release that was probably penned by securities lawyers.

That development followed a report in Saturday’s Atlanta Journal-Constitution about Roark Capital, the private-equity firm that owns McAlister’s Deli and a group of restaurant brands (Moe’s Southwest Grill, Schlotzsky’s, Carvel, Cinnabon) franchised by Focus Group. The story explained that Roark expects to complete as many deals in the current year as it consummated in the previous eight, with several set to close by November.

“We feel like we’re ready to start investing again,” Roark managing partner Neal Aronson told the AJC’s Joe Guy Collier.

Sandwiched between those two instances of check-book rattling was the announcement that Church’s fried-chicken chain had officially been sold, some three months after a deal was announced.

So is this the start of a buying trend? Are companies shopping for restaurant companies again?

After a virtual halt this year in restaurant deals, it certainly feels that way. But it’s all relative. For one thing, private-equity companies are usually the wheeler-dealers in such a spree. They buy, they sell.

This time around, many of them are stuck on the seller side of the table, trying to peddle the chains they amassed in better times. Foreign companies may be the new shoppers. But how active will they be?

My prediction: There’ll be a flurry of activity that feels like a cut-rate auction. But it’ll take awhile to see M&A come close to the level we saw before the Great Recession.

But what’s your assessment? I’d love to hear some discussion about which might be a fad and which might be the start of an actual trend.