What's the right way to grow overseas?

Wally Doolin, chairman Of Black Box Intelligence and a recovering chain executive, doesn’t flinch at bringing up the sometimes controversial issue of brand ownership. At last year’s People Report Best Practices Conference, he lobbed the firebomb observation that control of a concept by an investor, like a private-equity company, might prove a troubling change for an industry that was built largely on entrepreneurship. “Usually,” he noted at the time, “enterpreneurs make the decision that’s right for the business.”

At this year’s conference, which started today with a new session on the international market, he touched on a sensitive issue again by asking two U.S. brands what ownership model they’d have preferred to use in their overseas expansion. If they could do it over again, he asked officials of Starbucks and T.G.I. Friday’s, would they do more franchising? Less? How about joint ventures? What do they see as the ideal ownership model when you head abroad?

Nick Shepherd, CEO of Friday’s parent company, said it’s not a matter of what was right or wrong. Friday's chose a particular route because of factors that prevailed at the time. Any U.S. chain looking to grow abroad may have to make compromises because of it's situation, like not having enough capital to blitz a market. That would suggest franchising. But to woo a local partner, and maybe local financiers, a chain might have to hold a stake in the overseas stores. That'd mandate a joint venture.

Joint ventures can work beautifully, he stressed, but it’s important to structure it correctly. Having less than a 50% stake can mean surrendering too much control of the brand to the local operator.

You might have to start with a smaller stake, just to have some skin in the game, but it doesn’t make sense to have 15 or 20 percent because it puts you in a passive position, agreed Shepherd’s fellow presenter, Joe Canterbury.

Canterbury, Starbucks’ VP of international business development, noted that the coffee giant now wholly owns its restaurants in a number of foreign markets, a far cry from the small stake it held when it established its first beachhead, in Japan. But back then it needed to "have some skin in the game" because the brand was untried outside of the United States.

Franchising provides more control, they suggested, but at some point the local operator’s interests are going to diverge from the franchisor’s. Canterbury characterized it as inevitable.

Whatever model is pursued, they agreed, the key is finding the right local partner. The tenor of that relationship will be crucial in good times and in bad. A good partner can get you the sites and people that ensure success, stressed Shepherd. And even when interests diverge, a strong relationship enables you to resolve the situation amicably.

Shepherd noted that everyone in the room has had the experience of picking a franchisee who looked great on paper but failed to meet expectations as a business partner. It happens overseas, too, but what goes wrong in a store in Singapore can spread across the globe in a flash.

Doolin ended the session by asking the pair to recount one of the humorous instances that U.S. chain executives invariably encounter abroad.

Canterbury recalled how Starbucks worked with local authorities to resolve a trademark dispute. During the negotiations, they sat in front of a 20-foot-high portrait of Russian strongman Vladimir Putin, trying not to show the intimidation they felt.

Shepherd recalled a business presentation he co-hosted before his days with Friday's. His boss stressed at the time that they were not to mention an obscure sporting event to the 500-plus Europeans in attendance because it might offend them. Instead, he made a reference to Nazis in jackboots. Then he threw the emcee duties over to Shepherd.

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.

The worst news you haven't heard

The automobile business may not be the only industry to suffer a permanent dislocation from the recession.  A study by McKinsey & Co. apparently shows that one-third of the consumers who’ve cut back on restaurant visits are unlikely to resume their old dining-out habits after the economy rebounds.  

The revelation was shared by ketchup giant H.J. Heinz Co. during its recent conference call with investors. Because the company’s sales are so tied to the fortunes of the U.S. restaurant business, participants pressed officials for their take on the trade’s near-term future.  

The forecast wasn’t a rosy one: A 5% drop in traffic for roughly the next 11 months, after a 5% drop during the just-concluded fiscal year, and a 1% decline in unit counts.     

A transcript of the call quoted CEO William Johnson as also citing “a recent Mackenzie report,” though the translation appears to be an error. Johnson apparently said “McKinsey,” and the translator provided a phonetic translation.   

The report “said about a third of consumers will return to their normal eating-out habits once the economy returns but about a third won’t,” said Johnson, who noted that Heinz’s business strategy is based in part on that research. As one listener put it, the company expects “consumer frugality will stay fashionable.”  

“We’re expecting the worst and preparing for the best,” said Johnson.  

Ironically, indicated North American CEO David Moran, Heinz is trying to offset the foodservice slump in part by delivering “a restaurant experience at home.” The company’s giant packaged-foods business will push more foodservice-quality heat-and-eat meals, including two marketed under the T.G.I. Friday’s brand name.  

Has the sizzle gone out of their fajitas?

Casual-chain execs should stop worrying about when the recession might end and turn their attention to the real issue of their segment: Has casual dining jumped the shark?  

There’s a mindset taking hold that young people in their late teens are forsaking the Chili’s, T.G.I. Friday’s and Applebee’s of the world. As a longtime veteran of that sector observed, his 19-year-old daughter wouldn’t be caught dead in one of those places. She and her friends prefer fast-casual specialists like Panera, Pei Wei or Chipotle—concepts that promise better, less-processed food at a more affordable price, without the complications of sit-down service. 

Drinks, a big part of casual restaurants’ appeal for Baby Boomers, aren't that much of a draw to the younger set. You can get a water, tea or Red Bull just about anywhere.   

Fellow blogger and casual-dining stalwart Lane Cardwell has similarly heard the rumblings. As he wrote in a recent posting…   

It appears from conversations with a large number of restaurant operators that there is a generational divide that exists between fast casual and casual dining. The younger Gen X'ers and older Millennials (ages 18-35 ) seem to prefer fast casual and Baby Boomers seem to prefer casual dining.

He speculates that younger patrons are drawn by the newness, faster pace and pricing of fast casual, while those of us with a few more miles on the chassis appreciate the familiarity of the big casual brands and the comfort of table service.   

It’s a generational divide the industry has seen before, ironically when casual dining really caught fire in the 1980s. Beforehand, one of the dominant chain sectors of the business had been family dining, populated by brands like Howard Johnson, Denny’s, Coco’s/Carrows, Village Inn/Bakers Square, Bob Evans, Big Boy, Shoney’s, JB’s and a host of others.   

It’s no secret that those concepts had the sort of experiences in the 1990s that could fuel a thousand blues songs. They had their fans, but their fans were growing older and older. The diehards' sons and daughters just didn't have the same regard for the brands.

Some are altogether gone today, and the others are far different animals than they were in their heyday.   The market moved on to other concepts, and they were left behind. 

Is the same thing happening to casual dining?   No one really knows. But it’s a much more deserving target of mental energy than trying to guess when consumers will spend again. 

YouTube: Good for the soul?

Catholics use the confessional to ask for forgiveness. Restaurant executives seem to prefer YouTube.   

The latest mea culpa was posted Thursday by KFC, after it infuriated freebie hounds by suspending a much-ballyhooed giveaway of grilled chicken.  “On behalf of all our employees and franchisees, I just wanted to apologize to you. The response to our Kentucky Grilled Chicken has been overwhelming,” chain president Roger Eaton says in the video. “So we can’t redeem your free coupon at this time.”   

Translation: Our chicken was so good that the moochers scarfed up all the samples we were willing to give away. But here’s a raincheck and a promise of a soft drink for your troubles.   

He should’ve studied Domino’s handling of the employee shenanigans at a North Carolina unit to see what a regretful chain executive looks like. Patrick Doyle, the pizza chain’s U.S. president, came across as genuinely sorry and outraged that two knucklehead employees would mess with a restaurant’s food. “It sickens me,” says Doyle. “We sincerely apologize for this incidence…We are taking this incredibly seriously.”   

Let that be a lesson to any chain that’s considering a YouTube apology for lapses like, oh, maybe serving a snake’s head in some broccoli, or selling a Happy Meal with a condom inside.

That’s assuming T.G.I. Friday’s and McDonald’s will turn to the Tube for their make-nice efforts. Several other chains didn't use the video-sharing site to explain their big-time blunders. Instead, Quiznos just let its recent free-subs fiasco reek in public for awhile.  Crain’s Chicago Business quoted an official as charactering the Million Subs Giveaway as a marketing home run despite the fallout with some customers.   

Burger King apologized via more traditional media for its “little Mexican” depiction in a European ad campaign, but it has yet to address parents who are outraged by the chain’s SpongeBob SquarePants commercial for U.S. youngsters.   

Hey, it’s worth 15 minutes and the investment in a Flip video camera. 

What you won't read in the papers

Last week delivered a few indications the restaurant industry may be entering a recovery. Relief couldn't come too soon, given how the trade appears to be one moon howl away from snapping. A bunch of places have even forgotten they're supposed to charge for food instead of doling it out for a reminder of what customers look like.

In all the craziness, some urban myths have clearly taken hold. Here, as a public service, is a delineation of fact and fiction:

• There’s absolutely no truth to reports that T.G.I. Friday’s is giving away a restaurant franchise with every appetizer ordered this week. You have to buy an entrée, too, though they’re down to $1.


• Michelle Obama has not challenged Alice Waters to go hoe-to-hoe over who has the best organic string beans. Nor will Bo the Dog be trained to bite Waters in the onions. Or not as long as she shuts up about a First Garden.


• It’s a complete myth that restaurants’ latest promotion is giving customers the keys and asking them to lock up when they’re done gorging for free. Denny’s, however, declined to comment.


• Tao, pegged by Restaurants & Institutions as having sales in excess of $68 million a year, is not buying General Motors to replace valet parking with a car giveaway program.


• Steve Wynn is not relocating the state of Rhode Island into his restaurant-studded Encore casino as an entertainment feature. However, the governor of Maryland commented that he’s constitutionally obliged to do what’s financially best for constituents.


• Gordon Ramsay has not been serially watching “The Wrestler” in hopes of aping Mickey Rourke’s career comeback.


• Police discount reports that hundreds of seders were wrecked when college-aged participants insisted that Chipotle’s Steve Ells is really the prophet Elijah. They also wanted to know where the bitter herbs had been grown.

Bourbon burgers further blur the lines

Be careful where you stand in today's restaurant market, because the ground appears to be melting. Turf that once defined a segment is oozing into other realms, blurring consumers' perceptions of where they can get a certain product and what they'll likely pay. That's good news if you're a fast-food concept catching consumers on the way down, but more reason to whine and thump your chest if casual dining is the ground you've homesteaded. Witness, for instance, the advent this week of fast-food whiskey--available just as a flavoring at this point.

Ribs or burgers flavored with bourbon or Jack Daniels were once the signatures of casual dining. Indeed, T.G.I. Friday's Jack Daniels grill menu was undoubtedly one of the most successful undertakings of its time.

But as of today you can get a Kentucky Bourbon Burger at Carl's Jr. Yesterday, Burger King unveiled its Bourbon Whopper, one of the new sandwiches showcased at the chain's new Whopper Bar, itself a deliberate encroachment on casual dining's turf.

I don't have the prices of the new burgers, but presumably they're a significant step down from the charge on casual dining menus. It's Carl's Six Dollar Burger mentality, carried to the next logical product.

Then again, turnaround is fair play. One of casual dining's big successes in recent years has been the introduction of sliders, the little burgers that were once a mainstay of the quick-service sector. Now the big fast-food chains like Burger King, Jack in the Box and McDonald's are copying the casual dining specialists who copycatted fast-food brethren like White Castle and Krystal, the originators of sliders.

Similarly, casual dining made a grab for traditional quick-service turf when it moved chain by chain into the take-out market, cleverly differentiated from the fast-food variety by the name "curbside takeaway."

Ironically, if the industry was smart, it'd stop stealing ideas in-house and try to, um, catch some inspiration from today's true foodservice successes, the supermarket/takeout shop hybrids like Tesco's Fresh & Easy and Walmart's Marketside. They've hit on some Harry Potter formulas that could make life extremely difficult for restaurants, regardless of whether they're competing on price, convenience or even quality. They're the innovators whose ideas should be plundered--er, complimented, I meant to say, as in imitation being the sincerest form of flattery.

Simon didn't say 'do that'

The following is a public service announcement to the nation’s casual restaurant chains.

Have you lost your minds?

Part of the reason you’re currently living a blues tune is a lack of differentiation in your menus. Every concept could rename itself That Place Serving a Bloomin’ Onion, Nachos, Fajitas, Burgers, Spinach Dip and Margaritas, and it wouldn’t be lying. A follow-the-leader approach led everyone toward a cliff.

So how are you trying to right the situation? Consider the latest promotion from Applebee’s: A $9.99 sirloin served with two sides. In a stunning coincidence, the LongHorn casual chain is also featuring a $9.99 steak dinner as of this month. And Outback has been selling a 6-oz. sirloin as part of a dinner for a penny less than $10 for a number of weeks. What are the odds???

At least Ruby Tuesday and T.G.I. Friday’s, two concepts that had their starts as “fern bars” (youngsters, ask your folks, but DO NOT bring up leisure suits), are resisting the temptation to copycat. As Ruby CEO Sandy Beall told investors last week, “We believe our burgers offer [an] incredible, differentiated and value category that resonates well with our guests.”

Okay, the chain also noted during the conference call that it was pushing a $5.99 burger with all-you-can-eat fries. But it’s sticking with a key point of differentiation. I mean, what other casual chain offers burgers? It’s not like Chili’s or Red Robin are known for that item.

And Friday’s? Well, consider the promotional head-turner it started pushing yesterday. Here’s the headline from the announcement: “T.G.I. Friday's Restaurants Unleash The 'Ultimate' Burger.”

I think I need a margarita. Or a ‘Rita. Or maybe a Lobsterita.

What are the odds???

Friday's grabs for Obama's coattails

Subway might’ve scored a coup by signing Michael Phelps as a pitchman, but T.G.I. Friday’s figured out a way to ride the stardom of an even bigger celebrity, and for free: Barack Obama.

The granddaddy of casual dining gave a drum roll and cymbal smash today for what it’s trumpeting as the World’s Largest Inauguration Party. On Jan. 20, while the moving trucks are probably still unloading at the White House, all 930 of the worldwide chain’s units will be celebrating the change in Oval Office occupants, according to the announcement.

The best, of course, is reserved for outlets in the United States. People who can’t get to Washington for the all-night parties can raise a little whoopie throughout the month by popping in a Friday’s for a half-price appetizer—provided they spring for an entrée. “Now that’s cool!” effused Friday’s.

The pull is even stronger for members of the chain’s Give Me More Stripes frequent-guest program: A free appetizer of chips (red and white; what happened to the blue?) and dip (can you froth up Curacao?) if they stop by a unit on Jan. 20.

And anyone who takes part in the Inauguration Day festivities gets a free button. Movie fans will know that kind of Friday’s swag is sometimes known as “flair.”

But I shouldn’t pick on Friday’s. It’s actually a good idea for a promotion. Indeed, the attempt seems to be part of an emerging trend. Having trouble getting customers into your restaurants? Throw a party!

The Riese Organization, a Friday’s operator in Manhattan, plans to host one in its Tropic Zone restaurant on Monday to celebrate the repeal of Prohibition 75 years ago. The guests of honor at the Times Square soiree will be 400 bartenders, waitresses, chefs and DJs, according to the announcement.

That event comes fairly close on the heels of the New York City event on Dec. 1 to celebrate the anniversary of the Bloody Mary.

The way I see it, with careful calendar planning, I could stay drunk with a lampshade on my head until the restaurant industry rebounds.

Since we last met...

Sorry if I sound a little rusty. Since Nation’s Restaurant News laid me off Tuesday, I’ve not been blogging, at least about the restaurant business (though I have been doodling about my new status at Pink-slipped). I figured I’d clear some of the cobwebs by offering a few observations about the industry’s week that was:

Pretty soon T.G.I. Friday’s is going to start giving away living room sets with every meal you order. The casual chain’s frequent-guest program, Give Me More Stripes, started out with the usual bonuses for heavy traffic. Then it tried to sweeten the deal by throwing a free helping of chips and dip into the mix. Now the sector’s granddaddy is adding the whipped cream of a free dessert to any card carrier who visits a unit next weekend and buys an entree. I’m holding out for a steak-knives offer.

Taco Bell president Greg Creed has cajones bellgrande. First the chain proves it’s a badass by dissing 50 Cent. Last summer it suggested the mega-star reprise a Chihuahua’s role by serving as an unlikely pitchman for the Bell. Change your name to 79 Cent, 89 Cent or 99 Cent, the home office publicly offered, and we might be able to come through with bling-bling—a $10,000 payment to the charity of your choice [Thugs Without Bullets, perhaps? Teeth Grills for the Disadvantaged?). The proposal was put forth just as Taco Bell was rolling out a new value menu, an event that may not have snagged much publicity on its own. But Taco Bell tweaking a nasty mother like 50 Cent? Big news, dog.

50 Cent, the only rapper whose music I refuse to let my wife play when I’m in the car, responded with a lawsuit. He may try hard (and convincingly) to come off as a gangsta in the hood, but he’s a brilliant businessman who’s not going to let his name be used gratis as part of a publicity ploy.

Taco Bell should’ve been grateful that the response wasn’t a drive-by. But instead of dropping the matter, it filed a blistering defense that accused the Gangsta Formerly Known as Curtis James Jackson III of not being able to take a joke.

Indeed, the Sept. 19 court filing, brought to light yesterday by the gossip site TMZ was one big bitch-slap (Fast Company called it “counter-blathering.”) Taco Bell alleged in its filed response that 50 Cent nee Jackson “has a well-publicized track record of making threats, starting feuds and filing lawsuits,” and that his suit was merely an attempt to “burnish his gangsta rapper persona.”

“Instead of responding to Taco Bell's sincere offer in the friendly and humorous spirit in which it was issued,” the suit reads, “Jackson launched an aggressive, offensive attack on Taco Bell in the press. In a heavily publicized sound bite, Jackson threatened legal action against Taco Bell stating, "When my legal team is finished with them, Taco Bell is going to have a new
corporate slogan: 'We messed with the bull and got the horns.'"

The filing—technically an “affirmative defense”--disputes or denies each on of 50 Cents’ assertions in turn. It then asks the court hearing the action to dismiss it and make the the rapper pay Taco Bell’s legal fees.

A heads up to Creed: Remember Tupac, my man.

Just think ‘pizza’ and your delivery order will be placed. Maybe we’re not there yet, but the major delivery chains are certainly inching closer to that Isaac Asimov-ian vision. Domino’s, a leader in online ordering, added the option last week of letting TiVo users put in for a pie via the set-top box. Papa John’s announced that it would try to protect IM fanatics from malnutrition by allowing them to buy a delivered pizza without leaving Facebook, an option that Pizza Hut started added in mid-Oct.

So, let us review. Want to order a pizza? You can now do it via your phone (cell or landline), computer, Facebook account, TiVo, video game, or text-messaging capability.

My money’s on Pizza Hut as the first to accept brainwave orders. The chain should just hope it doesn’t intercept any that were beamed by 50 Cent at its sister brand.