Top Ten Growth Chains 2007

You can't be a candy ass and compete in the restaurant business. According to equity research analyst Bob Derrington, the restaurant industry is as competitive as he's seen it in the last 15 to 20 years. Sales trends are weak and the macro-economic environment is playing with consumers' heads and their ability to spend. As a result, says the Morgan Keegan & Company restaurant anaylyst, consumers, particularly low-end consumers, are opting to eat more often in the fast-casual sector as opposed to the casual sector. It's no surprise that fast casual is doing well during hard times. After all, these concepts offer the reasonable price points of quick service with the better-quality food of a casual operation. That point explains why half of the players among this year's Top 10 Growth Chains are fast-casual concepts. As in years past, the list consists of the strongest $100 million-plus growth companies that posted among the highest company-wide sales and unit growth rates in the industry. What you won't find on the list is Buffalo Wild Wings, which performed so well we named it our Chain of the Year. Without further ado, here are this year's 10 powerhouse chains.

Five Guys Burgers & Fries
You've heard the expression "keep it simple, stupid?" That's exactly the game plan of this Lorton, VA-based fast-casual concept. As the name suggests, Five Guys does burgers and fries, but it does them very well. Everything is made to order. No heat lamps. Skin-on fries are hand cut and fried in peanut oil in small batches. The food has to be good because a typical order takes 10 minutes. Fast-casual customers don't wait 10 minutes unless the food is top notch. So, customers wait, but there is a barrel near the ordering counter filled with peanuts. So they eat peanuts and throw the shells on the floor. They don't allow this sort of thing at Union Square Cafe, but then customers there don't make it out alive with a six-buck check average.

The Five Guys formula is a beautiful thing that led to a 113 percent sales increase last year over the previous year. That's more than double the sales, which totalled in the ballpark of $106 million. Most of the company's 128 restaurants are scattered along the eastern seaboard, and there's no reason to believe this juggernaut won't keep rolling along whatever the economy chooses to do.

Potbelly Sandwich Works
Here's another fast-casual concept with a sandwich focus. This Chicago-based concept was created in 1977 by a young couple who ran a small antiques store where customers could also pick up sandwiches. The concept has retained its antiques store theme and neighborhood appeal. Based in Chicago, Potbelly increased sales last year by 40 percent, to about $140 million. Average unit sales for the concept, which now totals more than 150 units, are $1.2 million.

The appeal here is made-to-order sandwiches and salads and hand-dipped milkshakes, which are a step above fast-food feeders like Subway. With a $6 check average, you can see why Howard Schultz of Starbucks fame is now a major investor. To add to the experience, you'll even find live music. While the holy grail of concept development is to find the next, new hot thing, Potbelly proves that you can make money even with an old-fashioned theme if you execute it well.

Yard House
This 2001 RestauRant Hospitality Concepts of Tomorrow award winner is one of two beer-focused concepts on the list. Now 10 years old, it offers an upscale casual dining experience with better quality pub fare and, of course, beer. A key feature is a two-story, windowed keg room that showcases 600 beer barrels. Those barrels feed up to 250 beer taps at an island bar. Customers surely like the Yard House formula because the concept experienced a 50 percent increase in sales last year, reaching the $114 million mark. That growth reflected a unit increase from 11 to 15. With a check average of $22 per person, unit sales at Yard House are a whopping $8.5 million.

Despite its frat-boy appeal—all that beer, so little time—Yard House's setting is clearly a step above most beer houses. Beyond the usual burgers and pizzas, it offers appetizers such as grilled Korean b.b.q. beef, and entrees such as ginger-crusted salmon, grilled ribeye and New Zealand lamb chops. Yard House may not be the fastest growing concept in the land, but its per-unit sales suggest it's doing something very right.

Qdoba Mexican Grill
This is one of three fast-casual Mexican concepts on the list, and certainly a front-runner in the effort to convince America that there is more to Mexican food than gloppy refried beans, rice and loads of cheese. That's not to suggest it explores the depth and breadth of the cuisine, but its freshly made, on-the -spot burritos, quesadillas, tacos and nachos speak to customers who are looking for better quality, more healthful Latin fare. Sales at Qdoba grew 43 percent last year to $266 million. By year's end it had 318 restaurants, with units averaging just short of $1 million.

Qdoba was created in 1995 in the Denver area, which is ironic because Chipotle Mexican Grill, the other 800-pound Mexican fast-casual concept, also hails from that region. Nevertheless, the two fresh-Mex concepts have carved out their own niches and don't compete against each other in many markets. Qdoba, which was acquired in 2003 by Jack in the Box restaurants, is growing the concept primarily through franchising.

Moe's southwest Grill
Take notice: this is the third Latin fast-casual concept on this year's list. We could ask Dr. Phil what's going on in the heads of Americans, but let's venture a guess that changing demographics and a fresher, more healthful approach to Mexican food (as opposed to fast feeders like Taco Bell) have led to the rise of fresh Mex. Moe's follows the same formula as the other two Mexican top 10 contenders: offer burritos and the like with fresh ingredients made on the spot in front of customers.

In Moe's case, the formula led to a 32 percent increase in revenues last year, which resulted in $260 million in sales. The unit count increased by 14 percent from 280 in '05 to 342 last year. That's an average of $900,00 for each store on average checks of $8. Moe's may have the broadest menu choices in the category and much of its success comes from a strong customer focus. Every customer who walks through the door is greeted by employees who loudly shout together, "Welcome to Moe's." Whether it's intended or not, it's an ingenious way to turn tables quickly.

The Moe's Southwest concept was created seven years ago by Raving Brands, which also has in its portfolio Shane's Rib Shack, Planet Smoothie, Mama Fu's Asian House, Bonehead's Grilled Fish and several others. However, the Moe's brand was recently sold off to Focus Brands, which is the franchiser of ice cream stores, sandwich shops and cafes around the country and world. Clearly, Moe's proves, along with Qdoba and Chipotle, that Mexican fast casual is the right product at the right time.

Chipotle
Speaking of Chipotle, here is the granddaddy of Mexican fast-casual concepts. Not because it's that old, but because owner Steve Els recognized first that America was ready for quick, fresh, better-quality Mexican food. He also pioneered the idea that a concept can be environmentally friendly and sustainable and still make a healthy profit.

The company's overall philosophy has translated nicely to the bottom line. Last year its revenues grew by 31.8 percent to $837 million. That was through a unit increase of 489 in '05 to 567 in '06. Same-store sales increased by 14 percent with average unit sales of $1.6 million. Average checks hover around $8.50. Chipotle has made a big push in recent years to encourage customers to submit orders online or by fax, which allows them to bypass ordering lines and pay at the cash register. The process has increased sales by so much, that some Chipotle units now have a second production line just to handle these orders.

"Chipotle's philosophy of using hormone-free pork and naturally raised chicken and beef has generated a big buzz among customers, particularly younger customers, who appreciate the company's efforts," says Derrington. "And, by doing so, they offer a product with better flavor, which also leads to more sales. It can't lose."

Famous Dave's
The only barbecue joint to make last year's top 10 list was Smokey Bones BBQ & Grill. But Smokey Bones did not make this year's list and has struggled mightily as of late. Darden Restaurants announced recently that it would be closing 56 Smokey Bones units and may sell off the remaining 73 units. It seems, at least in this case, customers didn't want barbecue as frequently as other dining-out choices. Famous Dave's, which grew its sales (by 40 percent) and its unit count (to 145) last year, is swimming against the tide. That growth made this concept, created by Dave Anderson in Minneapolis 13 years ago, a $378 million company last year.

Famous Dave's went public several years back and stumbled, but the concept has thrived under its latest c.e.o., David Goronkin, who was awarded the IFMA Silver Plate Award in the chain fullservice category. Under Goronkin, average unit volume for the concept reached $2.5 million. The Famous Dave's downhome barbecue shack feel has hit a note with the public. It's also done a nice job of appealing to takeout customers.

Just last month it was announced that the largest franchisee of Famous Dave's had sold its 11-unit stake in the concept to make a bid for the purchase of Smokey Bones' 73 units. We'll keep an eye on that move, but meanwhile Famous Dave's keeps smokin' along.

BJ's restaurants
Here's another beer joint on the list, this one featuring an in-house microbrewery and a 100-plus item menu with deep-dish pizza as a featured player. Based in Huntington Beach, CA, the concept was founded in 1978 by two guys with a recipe for deep-dish pizza, which explains why it was originally called BJ's Chicago Pizzeria. Over the years, its menu has diversified. Last year, BJ's sales grew by more than 33 percent to $242 million. By the end of last year it had 56 restaurants, up from 45 the previous year. Its units are located primarily along the west coast, though its growth plans have taken the concept to Colorado, Texas, Oklahoma, Ohio and Florida. Unit sales last year averaged an impressive $4.4 million on check averages of $11.

The success of BJ's comes from its broad menu appeal, high-quality ingredients and reasonable prices, says Derrington. It also taps into America's growing desire for hand-crafted beers (seven seasonal or specialty beers are always on tap). With so many menu choices and such low price points, think of BJ's as the poor man's Cheesecake Factory.

Fleming's Prime Steakhouse
Fleming's is the most grow-up concept on the list or, at least, the most upscale. It was launched nearly 10 years ago in Newport Beach, CA, by industry veterans Paul Fleming and Bill Allen. Fleming is the brains behind several other concepts, including P.F. Chang's, Pei Wei Asian Diner and Z'Tejas Grills. Allen is the c.e.o. of OSI Restaurant Partners, which operates several concepts, including Cheeseburger in Paradise, which is also on this list. Paul Fleming's newest concept, Paul Lee's Chinese Kitchen, is a joint venture with OSI.

Fleming's grew last year to 50 stores, up from 39 the previous year. Its sales jumped 33 percent to $200 million. The brand did that on the strength of average unit volumes in the $5 million range. Check averages, as you might expect from a steakhouse, are in the $55 range. That's reasonably moderate compared to many upscale steakhouses, securing Fleming's place in the upper casual niche. It's a contemporary, lively steakhouse with a warm ambiance and animpressive wine list. This sort of setting appeals to both menand women, which explains part of its success.

Cheeseburger in Paradise
Here's another burger joint, this one dressed up in a Hawaiian shirt. It has the cachet of a celebrity connection—singer Jimmy Buffett. His song, Cheeseburger in Paradise, is the inspiration for the islandtheme concept, but pulling the strings behind the scenes is OSI Restaurant Partners, the folks behind Outback Steakhouse, Fleming's Prime Steakhouse, Roy's, Bonefish Grill and others.

OSI has done a fine job of moving this five-year-old concept forward, registering a 62 percent increase in sales last year to $120 million (compared to $74 million in 2005). The chain grew from 27 restaurants to 38 last year, almost all of them company owned. Last year's average unit sales came in around $3.9 million.

A good chunk of those sales come from its expansive tiki bar and drink menu. As you might expect from a concept that looks as if it was yanked from Key West or the Caribbean, Cheeseburger in Paradise has a wide demographic draw, though 20- and 30-year-olds are a large part of its core audience. Live musical acts help fuel the party atmosphere. Nevertheless, average unit sales appear to be slipping this year, which makes one wonder if the concept will remain one of OSI's growth vehicles, and if Cheeseburger in Paradise will be on next year's list of Top 10 Growth Chains.