THE YEAR OF COMFORT: STATE OF THE INDUSTRY REPORT

Michael Sanson

STATEOFTHEINDUSTRYREPORT

THEYEAROFCOMFORT

In light of the recession and the terrorism attacks, you’d think the remainder of 2002 would show little promise. Surprisingly, the future looks bright for those who offer comfort and value to their customers.

In the past, predicting how the year ahead might develop was based largely on the economic predictions of industry experts. Hardly an exact science, but nevertheless a science based on a laundry list of economic and industry-related factors, such as the consumer confidence index and same-store sales. That was before the terrorist acts of September 11th.

Like never before, the events that day have brought far more complexity to the delicate art of predicting what lies ahead for the restaurant industry or any other for that matter. Those senseless acts were so profound they have altered the American psyche and changed the way we live and think.

The psychological fallout of 9/11 has been debilitating, but add to that a full-blown recession, and one would think that hopes for 2002 are dim. Surprisingly, many we spoke with are convinced this industry will do just fine this year. Only a few are expecting a banner year, and only a few are expecting a year that will suck wind. In light of recent and current events, holding ground is not so bad.

The reasons for the comfortable outlook are simple: The restaurant industry–as Joe Baum, the late, great N.Y.C. restaurateur once said–is a pillow on which one can rest his or her head. This industry, on the most basic, psychological level, provides comfort, and that’s exactly what people crave now more than ever. Those who provide the softest, most comfortable pillows will rule in 2002.

THE BIG PICTURE

According to the National Restaurant Association, restaurant industry sales are projected to increase 3.9% this year over last. Adjusted for inflation, sales will come in around 1.4%. It’s a modest gain, though slightly larger than the 0.8% gain in 2001 when the recession kicked in and the Twin Towers fell.

A gain is a gain, nevertheless, so if the NRA’s projections hold up, the industry will chalk up its 11th consecutive year of real growth in 2002, with restaurant industry sales totaling $407.8 billion.

The good news is that of all the major eating-place segments, the NRA believes the full-service sector will fare the best, with sales reaching $146.7 billion, which is an increase of $6.3 billion over last year. The quick-service category is expected to produce more sluggish results, with a sales increase of only $4.1 billion.

According to an NRA survey, nearly half of the full-service operators it talked to believed business will be better this year, while more than a third are predicting business levels to remain about the same as 2001.

Surprisingly, more than half of the upscale operators the NRA surveyed are convinced business will improve in 2002. Are they whistling in the dark? Not necessarily, says Michael Whiteman, president of the New York City-based consulting firm Joseph Baum & Michael Whiteman Co. It was Baum, by the way, who conceived and opened the ill-fated Windows on the World restaurant in the World Trade Center.

"I believe high-profile restaurants that have been dependent on business travel and full hotel rooms are going to bear the brunt of the downturn," Whiteman says. "In the year ahead there will be less business travel and less long-distance vacation travel. But, smart operators will respond by looking to their local market, by finding ways to make customers feel comfortable, by finding ways to express neighborhood, family, closeness and intimacy."

The fact that people are staying closer to home doesn’t mean they are staying at home, which explains why the NRA is projecting another year of sales growth. Keep in mind that home cooking is quickly becoming a lost art. McKinsey & Co. predicts that in just a few years most Americans will never have cooked a meal from scratch.

The dependence on foodservice meals became obvious after the September 11th attacks. Though most folks retreated to their homes, they did so for only a week or two before heading back to their favorite local restaurants. J. Walker Smith, president of the New York City-based research and consulting firm Yankelovich Partners, says eating out is no longer a luxury, but a way of life and that some of the ripest opportunities for restaurants are now in their own backyard.

"A recent survey in USA. Today concluded that somewhere between 20 and 30 percent of those asked said they would spend more money on technology to connect with friends and family. This is a direct correlation to the terrorist attacks," he explains. "People are reassessing their values and thinking about what’s important to them."

The quest to amass material wealth is taking a back seat to older-fashioned values, says Smith. This shift presents a great opportunity for restaurants to provide a relaxed environment where customers can come together with friends and family. The shift he speaks of also translates into the types of food people are ordering. It’s no surprise, he says, that people are drawn to comfort foods. Certainly, there’s an economizing aspect to the choice, but folks are also drawn to no-risk foods that they know will make them feel good.

As a result, says ace restaurant consultant Clark Wolf, menus are getting streamlined. Restaurants are focusing on what they do well and getting rid of the excess and the overpriced. In many cases, his clients are reducing their number of menu items by up to 30%. In this "I-want-to-feel-good period," he adds, customers are ordering more alcohol and desserts, "but you can forget about the $18 cocktail; it’s off the radar screen." Forget the truffles for now, too, urges Wolf, "it’s all about mashed potatoes and green beans."

This movement toward comfort foods also leads to a key word that’s on just about everyone’s lips: Value. If you’re not offering value to your customers during this recession, you risk losing people who are watching their spending more closely.

And over-the-top conspicuous consumption is clearly out of favor, with customers balking at high ticket items ($75 bottles of wine) in favor of better values ($15 bottles).

Roger Berkowitz, the top dog at Boston-based Legal Seafoods, is predicting a good year ahead because his regional seafood chain has embraced the value philosophy. He admits, however, that his suburban restaurants will likely fare better than ones in urban centers affected by decreased business travel. While many companies are finding that they can conduct a larger chunk of their business without traveling (video conferencing is on the rise), Berkowitz believes consumers will eventually get back to vacation travel.

Bob Kinkead, the chef/owner of Kinkead’s in Washington, D.C., had a "great" year in his tourist-heavy city, but his success, he says, came because he focused on local customers.

"In this town, those who catered solely to tourists and business travelers were hit hard," says Kinkead, who owns a second restaurant on the outskirts of town (see Observer, Page 13) and is the founder of an organization dedicated to the independent restaurateur–The Council of Independent Restaurants of America. "If you take care of the local population year round, they’ll take care of you during hard times."

Kinkead and Berkowitz agree that all restaurants must reassess their strengths and weaknesses this year. "People are demanding greater value and they are no longer going to put up with huge wine and entree prices," says Berkowitz. "The smart operators will take advantage of this market shift and provide the most value they can because the winners in the end will be those who encourage customers to return again and again."

THE SHIFT TO CASUAL

There certainly appears to be a shift to the casual dining segment in the wake of the economic downturn and terrorist attacks. But that’s not to suggest the market wasn’t moving in this direction long before. Most everyone agrees that 9/11 accelerated what was already taking place, including the slowing of the economy and the move to casual. The good news is that the casual segment is ripe with opportunity for the future.

According to Matthew DiFrisco, a restaurant analyst with SunTrust Robinson Humphrey, the top 15 casual dining companies lay claim to only a 4% share of the total restaurant market. If you don’t do well in this segment, he suggests, then it’s probably because of poor positioning, poor execution, inefficiencies and the like.

"Casual dining chains offering both value and quality are well-positioned to gain even greater share of the consumer’s wallet. Even in this time of economic uncertainty, we don’t expect consumers to eat out less; but we do expect them to seek better value," DiFrisco reports.

He predicts, in light of the economic downturn and the subsequent slower retail sales trends, that the economy will remain sluggish through the first half of this year and return to comparable year-ago levels by the fourth quarter. He expects the entire economy to remain stable in 2003.

As a result of this slowing trend, many operators say they will go easy on their expansion plans. Columbus, Ohio-based restaurateur Cameron Mitchell says he suspended his company’s growth plans following the 9/11 attacks.

"Nine-eleven scared me, so we halted our expansion plans," he says. "Now is the time to make great deals. We’re going to pay off all our debt this year and head into next year positioned to take advantage of economic expansion."

Mitchell has nine restaurant concepts. His fine dining operations took a hit this year, while his midscale casual concepts experienced positive sales gains. He was in the midst of his greatest expansion push ever (three new concepts) when the terrorists struck. This year he’ll be focusing on training program improvements and in-store capital improvements. "We’ll also be hiring key individuals for future growth because sales will rebound later this year."

Mitchell says he had plans to open two high-end steakhouses this year, but put those plans on hold in favor of expanding his mid-price casual concepts, one Italian, the other seafood.

Howard Gordon, who heads business development for The Cheesecake Factory, agrees the upscale category is among the riskiest places to operate for now. Though Cheesecake occupies the upper end of the casual dining category, he says customer counts are way up, while competing white tablecloth restaurants are hurting.

"I was in Seattle recently where many white tablecloth restaurants have closed," he says. "But there was a 45-minute wait at our place. No matter what the economy is like, people want value, but you have to give them an experience to go along with it. I think we provide the sort of experience you might get at an upscale place, but it’s not a real financial splurge because customers often leave with two or three meals from leftovers."

Perhaps no restaurant company has fared better during this rough period than Darden Restaurants, which operates the powerhouse Red Lobster and Olive Garden concepts, both known for the value they deliver. They are the darlings of financial analysts, who say their 11 consecutive months of above-industry same-store sales growth is due to "successful value positioning, strong demand and solid execution."

Clarence Otis, c.f.o. of Darden, says the company made sure the customer understood how much value both concepts offer.

"To respond to the economic environment, we’ve been very attentive to using the right promotional strategy that emphasizes value," he explained. "You have to promote heavily to make sure customers perceive the value. Once they understand, you’ll get them coming back."

The strategy appears to work. Darden, with more than $4 billion in sales, will open eight new Red Lobsters this year and up to 20 Olive Gardens.

Darden, however, is on the extreme end when measuring success. Closer to reality are the Cameron Mitchells, who are exercising caution in the heartland, and those operating in tougher markets such as

Orlando, Las Vegas and San Francisco. Niki Leondakis of San Francisco-based Kimpton Group, which operates 28 boutique-style hotels with hip mid-scale restaurants, says 2001 was a rough ride. Along with the recession and travel fallout from 9/11, San Francisco also had to deal with an energy crisis and the slide of dot.com companies.

Leondakis, however, has led a diversification surge that took Kimpton’s expansion efforts outside California and to other states. Nevertheless, for the 15 restaurants it has in S.F., revenues were down. To offset the slowdown, Kimpton restructured hours of operation (close at 10 p.m., not midnight) and decreased or eliminated non-profitable meal periods (Sunday dinner and Saturday/Sunday lunch).

A benefit of this unsettling period, says Leondakis, has been the move to comfort foods, which means using more secondary meats (that can be slowly braised) and more starches, such as pastas and potatoes. The slow economy also helped pump up the anemic labor pool, she adds.

A SLOW RECOVERY AFOOT

That’s not a lot to hang your hat on, but fourth quarter sales reported by many companies are. Michael Kaufman of Metromedia Restaurant Group, which operates Ponderosa Steakhouse, Bennigans, Steak & Ale and others, said business picked up dramatically in December. It was a nice surprise, he says, because as early as summer, restaurant sales were falling due to high gasoline and utility costs, which were exacerbated by the 9/11 attacks.

Signs of a comeback surfaced for the industry in November and December when a variety of factors shifted in its favor. Amid the economic uncertainty, consumer dollars that might have been spent on airfare and durable goods, were freed up for dining out, says restaurant analyst Robert Derrington of Morgan Keegan. Other pluses:

• A 40% decline in the price of gasoline put travelers back on the road.

• Lower interest rates drove increased mortgage refinancing and put money in consumer pockets.

• The mild start to the winter forced utility costs down, saving consumers millions.

• Consumer confidence, after plummeting since last July, has been rebounding since November.

Signs are good that the year ahead will be, if not a smooth ride, one less bumpy than expected. Take the advice of Al DaCosta, president of the Foodservice Consultants Society International.

"Cautiousness is healthy for this business. If you’re willing to accept that you won’t see big gains this year, you won’t be disappointed," he says. "The key phrase this year will be: Steady as she goes."