Chains like Cheddar's and Buffalo Wild Wings are finding success by focusing on the atmosphere of their restaurants.
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After casual-dining sales plummeted earlier this year in the worst three-month performance since 2010, talk among chain operators took a sobering turn.
In first-quarter presentations before analysts, executives at many of the nation’s largest publicly traded casual-dining chains began speaking openly about something industry observers have said privately for years: The rules that built such casual-dining juggernauts as Chili’s Grill & Bar and Olive Garden no longer apply.
While economic conditions remain tenuous, that is no longer a valid crutch for explaining flagging sales — especially when some casual-dining brands are flying high. Instead, operators increasingly are admitting that lackluster performances reflect being out of line with consumer expectations, and they are mobilizing to improve their fortunes.
That’s not to say that they are abandoning their niche, though. In fact, several have declared recently that the need for the midpriced bar-and-grill segment remains strong. The challenge now is stealing back share from the fast- and polished-casual concepts by beating them at their own game.
“Listen, we know the category is under attack,” said Wyman Roberts, chief executive of Dallas-based Brinker International Inc., parent to the nearly 1,600-unit Chili’s and 44-unit Maggiano’s Little Italy casual-dining brands. “We know casual dining is not necessarily the bright shiny star that it used to be and that there’s pressure. There’s pressure from fast casual; there’s pressure from casual plus.”
But, he added, “We believe the casual-dining bar and grill is still a very viable category. It’s big and, more importantly, everything we know about the consumer says that they still want to use casual dining and dining out [to] connect with family and friends and fulfill this emotional need that they have — and that need isn’t getting less important in people’s lives; it’s getting more important in people’s lives.”
He continued, “And so the question isn’t, ‘Is it viable?’ It’s ‘Who’s going to win at this game?’ To us, it ... really gets back to staying focused on this continued, relentless [emphasis] on a guest experience.”
Similarly, officials of Maryville, Tenn.-based Ruby Tuesday said during a conference call in early April that they were rethinking their efforts to recast the 786-unit brand as polished casual.
“In our pursuit of a more upscale brand positioning, we may have unintentionally overshot the runway,” said James J. “JJ” Buettgen, CEO and president of Ruby Tuesday. “Said differently, we believe the biggest strategic opportunity for us is to migrate the Ruby Tuesday brand toward a more casual and approachable positioning and experience that is appealing to a broader guest demographic and suitable for a wider range of dining occasions, whether it be a fun night out for dinner and drinks with friends, connecting with family, date night or celebrating a special occasion.”
Roberts, Buettgen and several recent executive appointments at Darden Restaurants Inc. represent some of the fresh leadership traditional casual-dining brands are putting in place as they redirect their strategies.
And the need for new direction is critical. Casual-dining sales have been shrinking for years, said market research analyst Malcolm Knapp, who runs the Knapp-Track restaurant sales index.
The segment’s sales growth peaked in 2000 and has been in decline ever since, Knapp said. But a 5.4-percent drop in February, after falling 0.6 percent in January and 1.6 percent in December, according to the monthly Knapp-Track index, added urgency to the call for action.
The downward trend is not universal, though. According to market research firm Technomic Inc., the fastest-growing full-service chains of 2012 — Cheddar’s, Buffalo Wild Wings, Yard House, Brio Tuscan Grille and Joe’s Crab Shack — all recorded sales growth of 17 percent or higher.
The growing divide between brands with robust growth and those without is playing out within the portfolio of the nation’s largest casual-dining operator, Orlando, Fla.-based Darden, which operates more than 2,000 casual-dining restaurants.
The company’s core brands, the 818-unit Olive Garden, 705-unit Red Lobster and 416-unit LongHorn Steakhouse chains, saw same-store sales fall 4.6 percent during the company’s February-ended third quarter, with company officials pointing to the continuing struggle of conveying to consumers an image of affordability.
Yard House contributed to a 2.3-percent increase in comps for the third quarter at Darden Restaurants' Specialty Restaurant Group.
Wall Street analysts, however, are pinning hopes on Darden’s Specialty Restaurant Group, which comprises more upscale full-service brands like Seasons 52, Eddie V’s Prime Seafood, Yard House, The Capital Grille and Bahama Breeze. The group reported a same-store sales increase of 2.3 percent for the third quarter.
Over the past 12 months the Specialty Restaurant Group has contributed 45 percent of the company’s total sales growth, despite having only 157 restaurants, Darden said during analyst presentations earlier this year.
“We are, for sure, in a new era for dining out [that reflects] important new competitive and consumer realities,” said Clarence Otis, Darden’s executive chairman and CEO.
Otis noted that the Specialty Restaurant Group would be increasing its size and contributions to the company’s results.
“We’re making significant changes to make sure we take advantage of these realities,” he said.
The contradicting results within Darden’s portfolio offer an educational snapshot of what’s working with today’s consumers and, more importantly, the steps older mainstays of the casual segment need to take to improve their fates.
Quality food needs to be a priority, said George McKerrow Jr., co-founder and CEO of Ted’s Montana Grill, a 44-unit casual-dining chain based in Atlanta. The privately held brand boasts an authentic American menu and several bison-based items.
“In order to meet their numbers, [mass-market chains] had to lower quality,” said McKerrow, who also founded the LongHorn chain that is now owned by Darden. “They became predictable. There was no trust factor among consumers. What you see on TV is hardly ever delivered.”
Successful brands today need to be “culinary forward,” McKerrow said.
Cheddar's was the fastest-growing full-service chain in 2012, according to Technomic.
Cheddar’s, for example, is built on the promise of scratch cooking and uses the tagline “handmade food” to emphasize that message. Cheddar’s was the fastest-growing full-service chain in 2012, according to Technomic, with sales of $540 million, up 23 percent from a year earlier. The Irving, Texas-based chain ended the year with 127 units, a 22-percent increase from the prior year.
Knapp pointed to Benihana as a nearly 50-year-old brand with “regenerative DNA.” The chain saw sales plummet during the recession and was left for dead, Knapp said. Turnaround efforts, however, included the hiring of one of Japan’s original Iron Chefs, Hiroyuki Sakai, as executive culinary advisor to upgrade food quality.
“They brought the food back to what it should have been and what it had been years before,” he said.
Among the chains doing more than $200 million in sales that Knapp-Track follows, Benihana was No. 1 for seven out of the 12 months in 2012, Knapp said.
Last year, New York-based private equity firm Angelo, Gordon & Co. took 110-unit Benihana private in a $295 million buyout, saying the brand is now well-positioned for growth.
Pumping up the ambience
Creating energy within a restaurant isn’t necessarily easy to do, but today’s successful casual-dining brands have a great vibe.
Buffalo Wild Wings, a brand that continued to grow throughout the economic downturn, is known for its energetic atmosphere, Knapp said. And now, the 900-unit sports-bar concept based in Minneapolis is looking to ramp up that energy with a new prototype designed to create a “stadium experience.”
The second prototype unit opened in April in Santee, Calif., and Wall Street analyst Conrad Lyon of B. Riley & Co. LLC sees it as a massive improvement over the first of the revamped units, which opened in Ohio last year.
“While early,” Lyon wrote in a recent report, “we think the prototype appears an excellent vehicle not only to enhance the guest experience but to increase [Buffalo Wild Wings’] dominant position in the category.”
The new prototype offers 80 TV screens, giving guests an opportunity to watch more than one game or sport, and an enhanced audio system. A divided dining room allows for the option of smaller-group viewing areas. The bar — which features a giant TV screen hanging over it — is at the center of the action, and its new horseshoe shape encourages people to talk with each other — a feature that appeals specifically to Millennials.
“Sports support socializing, and Millennials are socializers,” said Darren Tristano, executive vice president of Technomic.
At the 43-unit Yard House, a carefully curated music selection adds to the energy of each restaurant. The Irvine, Calif.-based chain has an 8,000-song library and in-house music experts who create playlists customized to each daypart.
Strong bar sales are a common denominator of the casual-dining brands that are excelling today.
While such older casual brands as Chili’s and the 900-unit T.G.I. Friday’s generate about 14 percent of sales from beverage alcohol, so-called “next-generation” chains, such as Buffalo Wild Wings and BJ’s Restaurant and Brewhouse, tend to generate 25 percent of sales or more from alcohol, according to Technomic.
BJ’s, a 130-unit chain owned by Huntington Beach, Calif.-based BJ’s Restaurants Inc., operates its own microbreweries and also contracts with regional brewers. It recently added a new line of proprietary premium craft beers with bolder taste profiles.
Among Darden’s specialty brands, Yard House typically offers 130 beers on tap using a state-of-the-art draft system that ensures freshness. And 33-unit Bahama Breeze is boosting its already strong bar sales with the recent addition of a late-night happy hour.
Red Robin Gourmet Burgers hired a mixologist last year to bolster its beverage menu.
Red Robin Gourmet Burgers, a Greenwood Village, Colo.-based brand with 474 locations, last year hired a mixologist to highlight a focus on premium libations and has won attention with its beer milk shakes. And Fleming’s Prime Steakhouse & Wine Bar, a 65-unit chain owned by Tampa, Fla.-based Bloomin’ Brands Inc., has been spotlighting its female-friendly wine program and testing interactive wine lists on touch-screen tablets.
Meanwhile, 12-unit Cooper’s Hawk Winery & Restaurants, based in Chicago, makes its own wine and offers extensive by-the-glass options.
Putting on the polish
The gap between upscale casual — sometimes called polished casual — or brands with average checks between $20 and $50, and the mass-market brands with average checks between $12 and $20 is growing ever wider.
Over the past five years the lower-priced casual-dining chains have seen sales grow about 0.7 percent, while sales at polished-casual chains have grown 3.7 percent, according to Technomic.
Such higher-end brands appeal to consumers who have not been as hard hit by the economic downturn. They have money to spend on dining out, and they’re willing to pay more for a higher-quality experience, Tristano of Technomic said.
Looking to capitalize on the profitable niche, in February Fidelity National Financial Inc., which last year acquired the polished-casual J. Alexander’s chain, announced the creation of a new restaurant company that will focus on the upscale-dining segment.
The new Nashville, Tenn.-based company, which is called J. Alexander’s LLC, will operate 32 J. Alexander’s restaurants and 10 Stoney River Legendary Steaks units that were previously operated by American Blue Ribbon Holdings LLC, in which Fidelity also holds a majority stake.
Fidelity said American Blue Ribbon, operator of the O’Charley’s, Max & Erma’s, Ninety Nine Restaurants, Village Inn and Bakers Square concepts — all of which have lower check averages — would focus on family and casual dining.
William Foley II, Fidelity’s executive chair, said the new upscale-dining group is planning to acquire more high-end concepts to add to its portfolio.
“We believe our restaurant operations can be optimally managed through a distinct upscale-dining-focused company and a separate family- and casual-dining-focused company, allowing each to be better positioned to take advantage of opportunities in their different market segments,” Foley said in a statement.
Many see the evolution of casual dining as a natural process.
“It’s a question of better restaurants driving out not-as-good restaurants,” market researcher Knapp said.
It’s time, Knapp added, for casual operators to come to grips with the need for change.
“Don’t stay in a state of denial,” he said. “That has killed more brands than anything else.”
Contact Lisa Jennings at [email protected].
Follow her on Twitter: @livetodineout.
