Full Service Takes a Bigger Bite

Michael Sanson

State of the Industry Report
2003

Full Service Takes A
BIGGER BITE!

Recession, terrorism and the threat of war loom large. Nevertheless, most–particularly
those in full service–remain guardedly optimistic about the year ahead.

Last year at this time the editors of RH predicted that 2002 would be "The Year of Comfort," comfort referring to the population’s desire to embrace the simple, familiar things in life as a coping mechanism for the recession, terrorism and turbulence then troubling the world.

Now that 2003 has come around, little appears to have changed. The economy remains sluggish, terrorism is still a threat and the prospect of war looms. Is comfort food still what the doctor ordered?

We’ve taken the pulse of foodservice experts around the country and most are cautiously optimistic that the industry will have a good year ahead. Comfort will continue to reign, they agree, but roast chicken and mashed potatoes are only part of the answer. Restaurants will once again be called upon to provide comfort to the masses, but the definition of comfort has expanded greatly, our experts say. Comfort in the year ahead may mean braised short ribs to some, Champagne and caviar to others, or something as simple as a cozy place to meet friends and family.

Though traditional business advice has always been: "Don’t try to be all things to all people," those who can provide comfort on many levels, without betraying their focus, will fare the best in these turbulent times.

INDUSTRY OUTLOOK
According to the National Restaurant Association, the industry will make gains again this year. Sales are projected to exceed last year’s levels by 4.5 percent. That’s a record $426.1 billion. When adjusted for inflation, however, that increase is only 1.8 percent. Nevertheless, it still represents the 12th consecutive year of real industry growth, despite a recession that has shaken consumer confidence.

Once again, the full-service sector is projected to have the most success in terms of sales. The NRA expects full-service sales to reach $153.2 billion this year, which represents sales growth of 4.8 percent, which is $7 billion over last year.

According to the NRA’s 2002 Tableservice Operator Survey, approximately three out of five full-service restaurant operators expect to have a better year this year than last. A third of those surveyed expect business to be about the same, while less than one in 10 are looking for a year worse than last.

The most optimistic of the bunch were operators of full-service restaurants with higher check averages. Two thirds of those with $15 or more check averages believed their business would improve this year.

Overall, when full-service restaurant operators were asked what were the top challenges facing them in the year ahead, the economic recession was at the top of the list, regardless of check average size. Their concern reflects a turnaround from the economically vigorous years of the late 1990s, when recruiting and retaining employees were their top challenge.

The good news is that the restaurant industry is far more bulletproof than it has ever been. Restaurants in 2003 are no longer seen as a luxury or a special-occasion event. Restaurants are now considered a necessary part of our routines, and as a metaphoric chicken soup to soothe our souls.

"As restaurants continue to grow in their role as an important and essential component of the American lifestyle," says NRA boss Steven Anderson, "the industry further demonstrates why it is the cornerstone of the nation’s economy, employment opportunities and communities."

A COMPETITIVE ENVIRONMENT
If the industry makes slight gains as the NRA predicts, it will do so under a very competitive environment, says Bob Derrington, an equity research analyst at Morgan Keegan & Company. With the economy and consumer confidence in a fragile state, people will be very cautious about where they dine out.

"Consumers are not going to take as many risks as they have in the past," he says. "They’re going to eat where they know they’ll get a good meal. That’s why some of the biggest brands in the land, such as Olive Garden, Applebee’s and Chili’s, will thrive."

The competition will be particularly fierce in the quick service arena, Derrington says. Many customers, particularly baby boomers, appear to have lost interest in fast food, and the $1 price points established by McDonald’s will likely hurt the segment more than they will help.

Phil Lempert, a food trends and consumer analyst, agrees, and says McDonald’s and Burger King could be out of business in five years if they don’t begin listening to their customers. Quick service must change with the times by offering a variety of products and healthier, more nutritious meals, he says.

"If the chains don’t change their basic approach to food, they will disappear," says Lempert. If his prediction sounds preposterous, Lempert is quick to point out that Howard Johnson’s was a national force at one time, but faded to near extinction for failing to accommodate new consumer food trends.

While the quick service segment stumbles, the fast casual and casual segments will take the largest bite of the foodservice dollar in 2003, says Derrington.

"Fast casual will do very well in this economic environment because it offers better quality than quick service and at reasonable price points," he says. "There are a growing number of consumers who are opting away from fast food, and as a result fast casual is actually picking up share of market from quick service." [Turn to p. 43 for an update on the fast-casual market.]

The same goes with the full-service casual segment, he says. "The population is aging and they’re more sophisticated. They’re seeking ‘better’ eating-out

options, and the casual segment is meeting their needs," he says.

Derrington’s advice for the year ahead: Establish fair price points, offer creative new menu items and aggressively promote your menu.

ALL-PURPOSE RESTAURANTS
Last year may have been "the year of comfort food," says consultant Clark Wolf, but this year smart restaurant operators will take it a step further by becoming "all-purpose, all-accessible, all-affordable."

People use restaurants for dozens of reasons that go well beyond the special-occasion visit, he says. "The more comfort, value and use your restaurant can provide customers, the more they will be drawn to you."

Hotels are embracing this "all-purpose" philosophy better than most, says Wolf. Many hotels, for example, have gotten rid of their upscale restaurants in favor of restaurants that can be used all day long for a variety of purposes. On that note, Wolf suggest that many restaurants are overlooking opportunities, such as breakfast, to serve a broader audience. "As much business is done at breakfast as it is over lunch or dinner."

Fast-casual player, Atlanta Bread Co., for example, believed it was missing the mark at breakfast, as well as dinner. To pump up sales in those areas in the year ahead it has developed a new decor scheme and expanded its menu to include Belgian waffles and hot breakfast sandwiches for the morning and gourmet pizzas and pasta entrees at night. The attempts to appeal to a larger audience are expected to increase revenues by 20%.

Perhaps no other restaurant concept epitomizes Wolf’s "all-purpose, all-accessible, all-affordable" philosophy better than 75-unit Cosi Sandwich Bar. New York City-based Cosi is a combined coffee shop, deli, dine-in restaurant and bar, which satisfies the changing needs of customers as the day progresses.

The concept’s coffee shop draws morning and afternoon business; its sandwich bar draws the lunch and dinner crowd; while its spirits bar draws late-night customers.

Along with its food and beverage offerings, Cosi’s atmosphere is designed to change as well. In late afternoon, its lights grow dim, the music intensifies and its sandwich bar is concealed to reveal a full liquor bar. Table service and expanded menu options, such as pizza, support the night-time changes.

"For eight years we’ve been doing exactly what Clark (Wolf) suggests, but we do it without compromising our core strengths, which are great bread and coffee products, " says Andy Stenzler, c.e.o. of Cosi. "The key is to reach as many customers as you can while staying true to your culture."

ACCESSiBLE TO ALL
The Cheesecake Factory serves up another solid example of a restaurant concept that strives to be accessible to all. But unlike Cosi, which morphs from one personality to another throughout the day, The Cheesecake Factory has created an atmosphere with broad appeal.

"More than ever, during these trying times, people want to be around other people in a comfortable setting"says

Howard Gordon, Cheesecake Factory’s senior vice president of development and marketing. "In our case, we’ve created a place where single people and families, the young and the old are comfortable. And we give them over 200 menu items to choose. There’s something for everyone."

Gordon points out that portions are so generous at Cheesecake Factory, customers often take home enough food for a second meal. "That, my friend, is value, and it’s why we’ve just completed our 40th consecutive quarter of profitability."

Another upscale casual concept that appeals to a broad spectrum of customers is P.F. Chang’s. Comfort is a large part of its appeal.

"In the past," says president and c.e.o. Rick Federico, "customers who routinely visited 10 or so restaurants, have narrowed down their choices to maybe five. Their decisions, I’m convinced, are based on whether brands meet their expectations."

Because customers may be cutting out the number of places they visit, he says, doesn’t mean they are necessarily eating out less. They may even eat out more, but they’re going to do it at places where the comfort level is high, he adds.

Comfort can be delivered in many ways, says Federico. For example, all P.F. Chang operators are from the area the restaurant is located. For many customers, he says, there is comfort in knowing the person who runs the restaurant.

P.F. Chang’s has also brought comfort to the table by redefining the Chinese restaurant experience. The menu consists of traditional Chinese offerings, but does so in a hip, contemporary setting that includes non-traditional Chinese offerings such as a premium wine list, a wide selection of desserts, and coffee drinks from an espresso machine.

The Cheesecake Factory and P.F. Chang’s are well positioned juggernauts, but not everyone is feeling so confident about the future. That’s particularly true in New York City, where the price of retail space is going through the roof.

"I’m very optimistic we’ll do well again this year," says Drew Nieporent, whose Myriad Restaurant Group operates numerous restaurants in New York City and elsewhere. "But our biggest problem is not the economy or labor, it’s the escalating cost of real estate and rent. There’s nothing in most of our leases that takes into account the recession or, for that matter, the aftermath of 9/11. If anything, rents should be going down, but they’re going up and our profit margins are getting killed."

Tony May, who operates San Domenico, an upscale Italian restaurant, and PastaBreak, a fast-casual pasta concept, both in New York City, agrees.

"I would like to open more units of my pasta restaurant, but the only good real estate deals these days are for the landlords," he says. "There’s just too many people out there willing to pay ridiculous sums for space, and before they know it, they’ll be out of business."

PastaBreak is May’s effort at "all-purpose, all-accessible, all-affordable." The fast-casual operation serves high-quality pasta dishes prepared in 90 seconds (using a new technology) for as little as $3.99. Check averages overall are about $7 (soups and sandwiches come in around $6).

Meanwhile, on the high end, his San Domenico—considered by many to be one of the country’s best Italian restaurants—is employing smart strategies to put butts in seats.

"I have one promotion that brought in three cooks from Naples to create some excitement. I’m doing another promotion where diners will pay only $50 for a three-course dinner until the Dow Jones reaches 10,000. The way I see it, I would rather give customers a deal than have empty seats in my restaurant."

May’s observations are worth noting. He’s taken the time to study exactly what his customers want or, at the very least, what the market will bear. You must listen to your customers, he says.

That’s exactly what the folks at Applebee’s have done and it’s why they are expecting same-store sales increases in the year ahead. Late last year the chain rolled out the first phase of its "TO-GO" program, which involved a concerted effort to increase carry-out sales. Traditionally, carryout sales represents about 4% of its sales. The TO-GO program has "demonstrated considerably improvement" in sales.

This year, Applebee’s is rolling out phase two of the program, which allows customers to remain in their cars during carryout transactions. As a result, carry-out sales have soared.

Be all things to all people? That’s an impossible dream. But in the year ahead, consider new ways to reach your customers. They’ll be happy you do, and your accountant will as well. The year ahead will not likely be easy, but the smart and nimble will thrive.