There may have been a time when the restaurant business was an easy place to succeed. Maybe around the Cubs’ or Indians’ last appearance in a World Series. Or while Alaska was looking to become a state.
Certainly that day is not the present one. Industry long-timers say they’re hard pressed to remember an environment as bruising as the current state of competition—a chains-and-knives battleground for market share.
If it’s a war zone, then here’s what its Shermans, Eisenhowers and Lees telegraphed this week from the front. With third-quarter results now in the books, a number of field generals offered their view of the battle and how they intend to get or stay on top.
Here’s a sampling of their head-turning revelations on the state of the business and how some of its biggest names are coping.
1. The Cheesecake Factory reactivates its Asian venture
Nine years after opening the first RockSugar Pan Asian Kitchen, 12 months after putting it on hold, and a day after Chipotle gave up on its Asian venture, The Cheesecake Factory disclosed that it will develop a second RockSugar in 2017.
Cheesecake has been saying for some time that it intends to add a third growth vehicle to its fold, anticipating the day when the U.S. market couldn’t absorb another of the company’s namesake restaurants or a branch of Grand Lux Cafe. Observers speculated that meant a completely new venture—an acquisition, or maybe another startup of some sort. But might RockSugar be that alternative?
“It's on trend, we think, with the increasing consumer interest in ethnic cuisines,” said CFO Doug Benn. “And we just think that we're interested in trying a second site to initially expand the concept beyond the Southern California market, and we believe we've identified a good candidate for 2017.”
Cheesecake took a $6 million impairment charge against RockSugar last year, a sign the company did not intend to use the venture as a growth vehicle.
2. Chipotle’s hidden vulnerability
In the torrent of bad news this week from Chipotle, arguably the worst tidbit might have been overlooked. The fast-casual powerhouse has continued to build restaurants despite its severe traffic problems, opening 55 units in the third quarter alone. But sales at those stores are running 27% below the chain’s per-unit average and under what new restaurants were generating before a series of food safety problems threw the concept into a traffic nosedive.
The home office is trying to close the gap by advertising in new stores’ markets.
The tactic was one of several the chain revealed this week in disclosing an updated turnaround. More details are available here.
3. Chili’s bar recast
In the scramble by bar-and-grill chains to distinguish themselves in the over-packed casual-dining market, Chili’s was the brand screaming “Eureka!” this week. Executives of parent company Brinker International explained to financial analysts that the chain has hit gold with its claim of being a neighborhood watering hole for millennials.
The casual-dining workhorse has doubled the bar taps in about half its restaurants, filling the new slots with local craft beers, explained Brinker CEO Wyman Roberts. Chainwide, Chili’s comparable-restaurant sales declined 1.4% for its most recent quarter, but units with the revamped bar were in positive territory, according to Roberts.
The whole chain will have the expanded beer lineups in place within three months, “which gives us the opportunity to then market those products broadly,” he said.
“We're also continuing to evaluate additional enhancements to the bar business and the buildings to make our bar experience even more compelling, especially for our millennial consumers,” Roberts added.
4. How Panera’s checks are trending
A reliance on technology to boost off-premise sales has made Panera Bread Company the undisputed star of the fast-casual market. The impact of that enabler was revealed in dramatic fashion this week by President Drew Madsen, who explained why the chain believes comparable sales are no longer the best gauge of a restaurant chain’s health.
As he revealed, Panera’s check averages are soaring because of off-premise business. The average catering ticket is now $150. The typical tab for delivery is $20, and an order placed and paid through the company’s phone app averages $14. That compares with a normal check of $9 for orders placed at the cash register.
In computing traffic trends, each of those sales counts as a single transaction, Madsen noted. And that obscures how many guests are actually being served and how that number is changing year over year or quarter to quarter, misrepresenting the actual traffic change. As a result, Panera intends to measure its comparable performance going forward in terms of number of entrees sold, Madsen said.
5. The new real estate competitor
Wonder why restaurant sites are still so pricey when so many places are closing? That bump in supply should theoretically soften real estate costs, but operators agree that’s not happening.
Panera CEO Ron Shaich has a theory as to why. Back in the Great Recession, rents and land costs were kept high by the bids from banks, ironically fast growers throughout the banking crisis. At “this point, it's the urgent care facilities that are grabbing up everything,” said Shaich.
6. Sonic thinks small
A test underway at Sonic Drive-Ins aims to narrow the chain’s marketing focus to a dot. “We're testing segmenting drive-ins based on store characteristics such as demographics, average check, product mix, that's appropriate for a single store,” explained CEO Cliff Hudson. “Then we're testing the impact of delivering unique messaging to that store.”
He cited the example of a unit in a rural location relying more heavily on pitches for breakfast customers, while an urban store might concentrate on happy-hour promotions.
7. Big chill in restaurants’ shake business
A leading theory holds that decreases in supermarket prices are prompting restaurant customers to eat at home more often. There is not doubt that dynamic is cutting into the off-premise industry’s ice cream sales, according to Sonic’s Hudson.
Sales of frozen treats at Sonic “underperformed” during the summer, Hudson revealed, using the CEO euphemism for “dropped like a stone.” He suggested that customers would indulge during the hot weather by buying a few quarts of Chunky Monkey from the grocery store instead of heading to a Sonic for a shake.
“We saw periods of double-digit declines in the core shake activity for the quick-service restaurant industry over the summer,” he noted. The damage was particularly bad for Sonic because so much of its sales come from frozen beverages, he added.