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Sam King: Expansion king

Sam King is a major fan of the Golden State. King, president of Long Beach-based King's Seafood Company, has built a thriving stable of 11 restaurants—five casual King's Fish Houses along with a handful of upscale seafood and steak concepts—all in Southern California. His family has run restaurants there for half a century.

But after decades in California, King is considering building outside of the state for the first time. Spiraling energy bills, which bloat the already hefty cost of doing business in the area, are eating away at King's profit. The combined natural gas and electricity tab for his restaurants will top last year's bill by $500,000-$540,000—and he says higher bills from purveyors (reflecting their own utility costs) are taking another indirect but perhaps more profound bite. Adding insult to injury, rising utility prices seem to be hurting customer traffic. "People have less money, and dining out is one of the first things that gets cut," says King.

With all of this in mind, King is eyeballing markets in Nevada and Arizona. "We're not going to abandon California," he says, "but this last year made us say, 'Hmm, are there other things out there?"

California—with its deregulation-induced utility snafus and blackouts— has grabbed most of the headlines in the last year, but in markets across the country, restaurateurs are facing power outages and energy tabs up as much as three times over last year's rates. Indeed, according to the National Restaurant Association's 2001 Tableservice Operator Survey, nearly 75% of operators across the country have recently experienced higher energy costs.

Utility costs have never been insignificant, of course, but historically they were at least a fixed-line item. Now, they're increasingly hacking away at restaurant operators' already slim margins. The shock of seeing electric and gas charges surge nearly overnight has many scrambling to absorb these costs.

Some are passing the additional charges on to guests, others are negotiating for better rates and still others are seeking ways to cut consumption. Energy management systems that help regulate equipment are growing in popularity. But for many, like King, higher costs have finally begun to affect one of the most critical aspects of the business itself: The choice of where—or even whether—to build.

"You had something that at one point seemed to be semi-stable, a fixed cost, and all of a sudden it looks like it's an uncontrollable cost," says Ron Santibanez, a Moreno Valley, CA, operations consultant who helps owners choose sites. "If it's a cost you can control—by going to another area where there is a cheaper and more stable environment for power—then doing so only makes sense."

One of Santibanez' clients, a San Diego operator of quickservice restaurants, did just that. After being hit with 100%-200% increases in utility costs, the operator decided to develop its newest Mexican eatery outside the boundaries of San Diego County, in a community that generates its own power and offers it at lower prices than San Diego Gas & Electric.

"Land costs in San Diego County are high anyway, and when you add to that energy costs that have tripled over the last couple of years, that might be the straw that breaks the camel's back," Santibanez says. Stephen Grove, CEO of Atlanta, GA-based Restaurant Concepts, which operates 80 Applebee's franchises, adds that lower utility costs might nudge his company to choose one community over another.

Even those who aren't yet ready to abandon areas plagued by power problems are taking a closer look at energy costs when selecting sites. "Energy is part of our overall budget, and when we put together the budget, if energy prices are going up, it might affect how much we can pay for a site," says Jamie Goldberg, director of real estate for the 1,504-unit Popeyes Chicken and Biscuits in Atlanta, GA.

But even more important than the cost of power is its availability, according to Dennis Lombardi, executive VP of Chicago-based foodservice consulting firm Technomic. "The cost of a two- hour service interruption to a restaurant is far more onerous than a 60% increase in power rates," he points out.

Restaurateurs who have coped with dimmed signs and rotten food during blackouts are thinking hard before building more units in some parts of the country. "In an area currently experiencing blackouts, would I jump in and build a restaurant? No," says Restaurant Concepts' Grove.

Still, Grove adds that if blackout problems seemed temporary, he'd go ahead and build. Many restaurateurs insist that the mandate to expand is stronger than the threat of outages or doubled power bills. Ron Dee, VP of development for the 650-unit Red Lobster division of Darden Restaurants in Orlando, says utility costs are well down the list of items in his company's siting model. "Average check, wage rate, and cost of sales are the three things that impact our ability to develop restaurants in a particular market," he adds. Under Red Lobster's formula, Dee says a $1 average check increase would add more to the bottom line than a doubling in utility costs would subtract from it.

And some say that even though rising utility costs are hurting the bottom line, they're not affecting the choice of sites. "We're not numb to it, but it's not forcing us to look elsewhere for profitable new locations," says Devin L. Keil, VP for real estate with RTM Restaurant Group. Atlanta, GA-based RTM is the largest Arby's franchisee, operating 761 restaurants in 18 states. While energy "is definitely on our radar screen," Kiel says other issues, such as development restrictions and hefty impact fees, are causing much bigger headaches.

But even for companies whose current expansion plans remain unaffected by energy concerns, the potential for trouble is there. Karen Bellini, director of real estate for Harman Management Corp., says the company is moving forward on existing projects, but a recent experience may have a lasting impact on future site selection. The Los Altos, CA-based Harman, which operates more than 330 KFCs and Taco Bells in a handful of states, opened a new location downstate in Gilroy last May and started running up utility bills more than double what was anticipated. "We hadn't included utilities as part of our pro forma, but we may do so going forward," Bellini says. "We'll really have to have a good site to make sure it will support higher costs."

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