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Operations

How top independent operators manage a changing industry

Independents operators may be outpacing chains when it comes to sales growth, but the same challenges are stunting potential growth industrywide.
Photographs courtesy of Beauty & Essex

“You have to check every box,” Rob Katz, co-owner of Chicago’s Boka Restaurant Group, says. “You have to excel in every aspect to be a successful restaurant. It’s just too tough out there.”

Restaurant Business’ 2018 ranking of the Top 100 Independent Restaurants shows just how tough the marketplace can be, even for the most successful. Aggregate 2017 food and beverage revenue for these 100 restaurants was $1.845 billion, about 2.4% ahead of the previous year, a percentage increase roughly equivalent to menu-price inflation. In other words, little real gain.

Top 100 Independents across the map

That is not to say that impressive growth is impossible. Katz’s Boka Group, for example, opened a stylish new steakhouse, Swift & Sons, in Chicago in 2015. This year it makes its debut among the Top 100 at No. 66, with sales of $15.1 million last year. It did so, Katz says, because Boka checked the boxes—including a brash interior design that the site Chicagoist labeled“steampunk supper club” and “breathtaking.”

swift and sonsSwift & Sons (No. 66) — The high-end steakhouse from Boka Restaurant Group sits in what was once a cold storage facility. It shares an entrance with Boka's 60-seat seafood and raw bar, Cold Storage. Photograph courtesy of Swift & Sons

“You can’t serve good food in a boring room with mediocre service,” Katz says. “You have to be sensational in every detail in this competitive marketplace.” He says that means creating a distinctive, appealing and affordable menu; having stunning, signature design; and having flawless service.”

“It has gotten very competitive in this world we’re in, food and beverage. Very competitive and tricky. You have to blaze a trail instead of following.” 

Rob Katz, Boka Group

But those features have always been a must for restaurants looking to succeed, so what’s different now? “There’s so much pressure from home-meal options, from Whole Foods and Blue Apron to delivery,” says Lee Maen, partner at Innovative Dining Group (IDG), operator of No. 96 BOA Steakhouse, among other concepts. “You can eat great quality food at home very easily these days, so our task is to bring people to us. When they go out dining they’re looking for an experience.”

Michael Jacobs—partner in Corner Table Restaurants, which placed three The Smith locations among the Top 100 (Nos. 31, 34 and 39)—agrees. “If you look at the evolution of The Smith from 2007, we have definitely upped out game in terms of finishes and the look and feel of the restaurants. Guests have higher expectations,” Jacobs says. “The overall experience is more important to diners than ever before. It does make a difference.

“I tell our people all the time, ‘Guests will remember how you make them feel more than what you fed them.’ I think [emphasis on experience] has been on the rise for the past five years.”

“Our primary purpose every day is to make people happy. If we do that, people will visit as regularly as before and they will recognize that operators are making adjustments to accommodate the outside factors, that everyone is doing that, and [people will be] focused on going to the places that provide the best experience.”

Michael Jacobs, Corner Table Restaurants

Diners want to experience something different, something special, says Tricia Mackey. The VP of marketing for Chicago’s What If Syndicate—parent of Maple & Ash, which makes its first appearance on the Top 100 at No. 24, with $20.3 million in sales last year—Mackey says the company developed the restaurant “with the idea of taking the traditional steakhouse and flipping it on its head. So when you walk into Maple & Ash, you know it’s not your grandfather’s steakhouse.

“It’s hip and cool with a playful menu and amazing food quality. Chef Danny Grant has modernized the steakhouse menu with elements that are unexpected and even tongue-in-cheek,” Mackey says. “We’re across the street from one of the oldest, most popular steakhouses in Chicago [No. 89, Tavern on Rush], so we knew we had to be something different and distinctive.”

Those unexpected touches include putting an onion ring atop the wedge salad. And that playfulness extends to a menu option for the undecided labeled “I Don’t Give a F*@k,” a $145 invitation to let chef Grant create a special multicourse tasting meal.

le cou cou

Le Coucou (No. 94) —The New York Post called this concept from Starr Restaurants "one of the 21st century's four or five best restaurants of any type." Photograph courtesy of Le Coucou

There are tablecloths at Maple & Ash, as well as at Starr Restaurants’ elegant new Le Coucou (No. 94) in New York City. Some industry observers see the return of table linens, crystal and floral bouquets as indicative of a resurgence in formal fine dining. “I’ve seen some people bring back a level of European formality done in a contemporary way,” says Michael Stillman, founder and president of Quality Branded (with three restaurants among the Top 100). “I don’t know if I’d say lavish, but you see tableclothsagain in some places.I suppose that’s almost considered lavish, given where we’ve been [with bistros].” Corner Table’s Jacobs believes the upscaling of decor is part of the need to stand out. He prefers the descriptor “polished casual.”

Real-time cost struggles

While the dining experience may be shiny, seamless and happy, ownership’s experience is anything but. The operational challenges restaurateurs face are bigger, meaner and stronger than ever before: Soaring labor costs couple in many markets with labor shortages, rules on minimum wages and tip credits that vary from state to state and city to city, unreasonable rent increases, and a growing consumer affection for delivery that often relies on third parties and softens overall revenues.

“My sense is that because of all the costs pressures in the labor market, clearly there is a revolution going [on in the restaurant business],” says Jacobs, adding that there are concerns about what operating a restaurant will look like over the next three to five years. “It’s easy to get focused in on $15 minimum wage and not really know what to do and panic. It’s like a force you can’t control anymore,” Jacobs says. “So for us, we’re resigned to the fact that the world is evolving and that’s where we’re heading, and we have to operate a bit differently.”

From a labor perspective, Stillman thinks restaurants have a real challenge ahead of them over the next five to 10 years. “I think there will be fundamental shifts in how consumers are used to eating at restaurants, whether it’s tip-included or other things,” he says. “The average margin is 7%, so there’s not a lot of room for error. I think rising costs are a big issue now.”

The problems have been especially acute on the West Coast, with California lacking the tip credit and raising minimum wages. Maen of West Hollywood, Calif.-based IDG says the minimum-wage problem “is life-altering for the restaurant business.”

“The restaurant business has entirely redefined itself, especially here in California. From a few years back, we’ve had a 100% labor increase. The front of the house used to work on gratuities, tips. So the back of the house was always wages. We were able to focus on BOH wages with minimum wage in the FOH. Now that’s completely changed. It’s changed the industry itself.”

Dante Serafini, The Stinking Rose

So, too, is a 300% increase property tax, as happened to one of Boka Group’s restaurants. “I’ve been in this business a long time and I’ve never seen anything like that,” says Katz. “And then you couple that with a shrinking labor pool that pushes up wages even higher, plus a very competitive marketplace, and it’s hard. It’s really tough. And that’s why a lot of restaurants are struggling or closing.” Restaurateur Tom Colicchio, for example, closed his Craftbar in New York City after a 50% rent hike to $60,000 a month, according to Eater.

New York City’s beloved Coffee Shop, No. 82 on this year’s Top 100, is slated to close in October after 28 years. “The times have changed in our industry,” co-owner Charles Milite told the New York Post. “The rents are very high and now the minimum wage is going up and we have a huge number of employees.”

“[The economics of operating] have dampened new restaurant openings. …There are openings but by less savvy restaurateurs.”

Michael Stillman, Quality Branded

Restaurants “are an arm and leg business,” says Dante Serafini, partner in The Stinking Rose, which operates No. 72-ranked Franciscan Crab Restaurant on San Francisco’s Fisherman’s Wharf, among others. “It takes a lot of bodies to make all this work. When labor goes up, it’s serious.

He adds that he’s lucky food prices haven’t increased exponentially. “It used to be that food and labor were about the same percentage of our costs and now labor has taken over. … It’s not a balance you can work with for long.”

The hope, Serafini says, it that the labor cost increases have leveled off, at least in San Francisco, where the minimum wage is $15. “We have another $3 an hour in health benefits plus all the Social Security, workers’ comp and all the other add-ons. An entry-level dishwasher working 40 hours a week is at about $44,000 in San Francisco.”

Can’t skimp on the experience

The difficult market challenges don’t have easy solutions. A recent New York Times articlespotlighted San Francisco’s Souvla restaurants’ adoption of a labor-saving fast-casual service model, with diners getting their wine refills from the bar and runners delivering food that was ordered at a counter. If this year’s list of independents is any indication, upscale restaurateurs don’t want to go there.

“I know lots of restaurants are doing away with runners or bussers or cutting the number of servers,” says Jacobs. “To me, it’s a death spiral if you drop your service level. I would rather ask, ‘Can we do something to reengineer the menu a bit?’ so where we’re losing in labor we might make it up in food and beverage in some fashion. Or how can we operate more efficiently?”

Says Serafini, “We’re a full-service restaurant. That’sthe event.It costs more.” His team can’t abbreviate the service much, he says.  But that doesn’t mean automation is totally out of the picture as a cost-savings measure: “We need the bodies, but we’re looking for any automation that can help reduce labor. We’re trying to identify the best employees, compensate them well and have them help train [new employees] to reduce labor turnover, which is expensive. Otherwise we’re just focusing on service. The end experience is what matters.”

“We get Yelp feedback like everyone else. When we started with labor increases and prices went up that would be the biggest complaint we’d hear. The cost of food. That has subsided a lot. People come to large cities and they know that the cost of doing business is high. The whole experience is an event and that gives us an opportunity to wow them and make it eventful. And we’re able to charge.”

Dante Serafini, The Stinking Rose

To maximize revenues, some restaurants are renting out dining rooms to freelancers in off hours or outsourcing bag-check rooms to private services, according to a New York Post article. Such gambits are popular because no one wants to raise menu prices.

“We’ve pretty much capped out,” says Serafini. “We’re at a point where we can’t raise prices any more. We do hear the feedback [about high prices]. We do understand why. We’re at the edge where we could price ourselves out of the market.”

maple and ash

Maple & Ash ( No. 24) —Wine Spectator named the steakhouse's wine program one of America's best. The concept also launched a Maple & Ash Wine Club. Members get bottles delivered quarterly, and they have a personal wine captain who gets to know their preferences. Photograph courtesy of Maple & Ash

However, restaurateurs contacted for this article leavened the despair over operations challenges with aggressive expansion plans. Boka is opening a Girl & the Goat (helmed by “Top Chef” winner Stephanie Izard) in Los Angeles. A second Maple & Ash will open soon in Scottsdale, Ariz. Quality Branded has a Quality Eats in the works for Chicago, where Corner Table is looking to add a The Smith.

“The [development] deals are getting more flexible. Developers need restaurants more than ever and I think for new locations we’re going to be able strike a better deal on rent or more TI’s [tenant improvements]. There’s a lot of demand for a restaurant especially if they’re a brand bringing a lot of bodies to the location. Retail is fading as a draw.”

Lee Maen, Innovative Dining Group

Chicago researcher Technomic forecasts real growth for foodservice of just 1.2% this year, below the cautious 1.4% it saw for 2017. But most Top 100 operators know they have checked all the boxes and are well-positioned to withstand the current turbulence. 

“I think the great operators are standing tall at the moment,” says Jacobs. “I’m not overly concerned. I feel we’re a good enough operator that we can figure out how we have to evolve to meet the challenges of the market.”

 

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