Restaurant Expansion: Profit Motives

Wednesday, 07 January 2009 19:10

January 1, 2008

Restaurant Expansion: Profit Motives

Restaurant chains find ways to protect margins as they expand in a recession.

By David Farkas, Senior Editor

In early November, Jack Butorac was feeling bummed out at a Las Vegas restaurant conference that focused on financial performance. Admits Butorac, CEO of Toledo, Ohio-based Marco's Pizza, which operates and franchises 175 pizzerias: “It was depressing to talk to some of these folks. They really have challenges out there.” Butorac doesn't? Apparently not. Marco's intends to open 61 restaurants this year, most run by franchisees. “We feel good,” he declares.

He wasn't the only operator Chain Leader talked to who said their companies were still adding restaurants—albeit at a slower rate—amid the wreckage of the economy. However, when asked if they were taking measures to ensure unit-level economics still provided a superior return, nearly all said yes. Creative Gatherings

“Our buildings are very expensive, and we are always working on ways to keep costs down,” says Lamar Bell, senior vice president of finance and development at Raleigh, N.C.-based buffet concept Golden Corral. The chain intends to open a half-dozen “pavilion” models, which run about 14,000 square feet.

For the last several years, Bell has been holding two-day meetings in new units with the company's suppliers and builders, asking them to examine the building for cost-saving ideas. He says his goal is to determine if there's “a way to get 90 percent of gain for 50 percent of the bucks.”

So far, most of the workable ideas involve less expensive finishes and more efficient HVAC. Bell, who says the rate of unit-level returns hasn't changed in 20-plus years, nonetheless insists, “We're not dumbing anything down in this current environment. We are not taking one thing away from the customer.”

That's become one of the biggest challenges for operators as margins have deteriorated. Customers, worried about job loss and housing values, have steered clear of restaurants since summer. Third-quarter same-store sales, for example, declined across all industry segments. Despite an uptick in consumer confidence in November, to 44.9 from 38.8, job losses for the month totaled 533,000, the highest monthly total since 1974.

“Consumers remain extremely pessimistic and the possibility that economic growth will improve in the first half of 2009 remains highly unlikely,” announced Lynn Franco, director of The Conference Board Consumer Research Center, which publishes the Consumer Confidence Index.

Minutiae Matters

The recession is forcing Spicy Pickle COO Tony Walker to evaluate every aspect of his franchise business. He recently eliminated a new pizza program and a $3,000 backup meat slicer from the Denver-based fast-casual sandwich shops. Pizza failed to spark nighttime sales, and the slicer was deemed a luxury.

Now Walker wants to trim $50,000 to $75,000 from new builds. “This is our No. 1 goal. We are going line by line, asking, 'Do we need this?'” he says. A $4,000 beverage cooler sitting next to the register got a thumbs down. It was nice to have but inefficient, recalls Walker, adding that without a top, the device was “constantly cooling itself down.” Walker is replacing it with a self-draining, ice-filled tub. He will have to extend the millwork at the register to accommodate it. “It will be a fraction of the cost,” he claims.

Butorac is going through a similar drill. He's counting on a beverage vendor to install coolers in the counters in Marco's new prototype.

Despite reporting systemwide same-store sales of 4 percent in the third quarter, Butorac is taking no chances. He has asked his team to do a better job purchasing, especially of a stone finish used extensively in the Tuscan Village prototype. Last year, he launched a “seating program,” adding 16 seats at a cost of $5,000 per unit. The result, he boasts, is an additional $1,000 a week in revenue. “We're approaching things a little differently, finding ways to help franchisees generate profits by building sales,” he says.

Landlords' Largesse

On the company side, Butorac is happy with the rent deals he is landing. “Most of our stores are in strip centers, and we have been able to negotiate very good rents,” he says. “Some of these deals were too expensive a year ago.” In some cases, he adds, landlords have even offered tenant-improvement contributions amounting to half of the unit's $125,000 construction cost. “It's not reflected in the rent. I don't know how they do it,” Butorac declares.

Rents have dropped dramatically as retailers, including restaurants, have hit the expansion brakes. Today landlords are using a variety of aggressive marketing gambits to lure successful chains. “Caps on common-area maintenance, tax abatements, tenant improvements, really anything in their arsenal are being used,” says financial strategist and former Brinker International CFO Jim Parish.

Among recipients of such largesse is BJ's Pizzeria & Brewhouse. CEO Jerry Deitchle says landlord contributions are crucial to maintaining returns at the 83-unit casual-dining chain. “Over the long run, we can only grow our way to financial success in a highly productive, efficient and leverageable manner,” he explains. Leverage is the key when it comes to new builds. The Huntington Beach, Calif.-based chain now averages $1 million in tenant improvements, equal to roughly one-fourth of the total $4 million investment package.

Systematic Approach

This year Deitchle will re-evaluate seating and kitchen layouts, though he insists he doesn't intend to trim investment costs but instead boost productivity. BJ's will roll out a “manager dashboard,” for instance, in the form of a flat-screen monitor. Placed in kitchens, it will show real-time data as each shift progresses. The company already uses a kitchen-display system, Web-based labor scheduling, table management and theoretical food-cost software.

Systems are also important at Burgerville, which is opening its first new restaurant in six years, in Tigard, Ore., in April. CEO Jeff Harvey says the Vancouver, Wash.-based chain, which operates 38 restaurants, has finally addressed labor scheduling in a systematic way. “We won't be opening [restaurants] at a high pace and then managing down to a lower pace because now we have the ability to manage cost,” he says.

The Tigard restaurant will be Harvey's first opening, though he has remodeled one unit so far. An engineer by training, he says he was hired in 2004 to create new systems. That achieved, he is also redesigning the restaurant. “We are maximizing dining rooms and minimizing kitchens,” he says. The new 2,600-square-foot-prototype features a drive-thru and wood finishes instead of costlier brick, widely used in the other restaurants. Units average $1.8 million, Harvey says.

“My main message is, given what we know about the economy, we prefer to take a little more of an aggressive approach,” he offers. “We're not about to cut the part of our business that brings in the money.”

Which is?

“New restaurants.”