Grill-buffets confront a smorgasbord of challenges

Changes in the buffet segment seem inevitable as the largest player, Eagan, Minn.-based Buffets Holdings Inc., continues restructuring efforts following its Chapter 11 bankruptcy filing in January.

The operator and franchisor, which is owned by a Top 100-ranked company, Caxton-Iseman Capital Inc., boasts more than 550 restaurants under its HomeTown Buffet, Old Country Buffet, Ryan’s Grill Buffet & Bakery, Fire Mountain Grill and Tahoe Joe’s Famous Steakhouse brands.

With the bankruptcy action, Buffets closed 73 restaurants during its third quarter ended April 2 and terminated about 2,500 employees. Buffets also put the 11-unit Tahoe Joe’s chain up for sale.

In January, Mike Andrews, chief executive of Buffets, said the company couldn’t support debt levels that resulted from the 2006 acquisition of the Ryan’s chain, primarily because of weakened performances resulting from the economy’s downturn.

Buffets Holdings blamed substantial declines in discretionary spending among core customers who’ve been hit by soaring gasoline and energy costs, increased debt loads from interest rate increases on adjustable mortgages, and lower consumer confidence in general.

“We intend to use this reorganization process to make the company stronger and more financially secure as we continue to contend with the current challenging operating environment,” Andrews said. “This restructuring is driven primarily by the need to reduce the amount of debt on our balance sheet. We also intend to take action to further enhance efficiency and profitability across the organization. This will include performing a thorough review of all underperforming locations over the next several months to determine if they can meet our long-term objectives.”

Buffets’ most recent quarterly earnings report, however, raised “substantial doubt about the company’s ability to remain a going concern” after the dust settles on its bankruptcy reorganization. As of the end of that quarter, average weekly sales were up 0.1 percent to $52,800 for the core HomeTown Buffet and Old Country Buffet brands, but same-store sales were down 1.4 percent, reflecting a 3.4-percent dip in traffic offset by a 2-percent increase in the average check.

For Ryan’s, average weekly sales were down 2.7 percent to $42,977. Same-store sales fell 5.4 percent, reflecting a 7.5-percent decline in traffic offset by a 2.1-percent increase in the check average.

Buffets’ fate depends on its ability to generate cash flow and return to profitability. In December, Buffets brought on former Yum! Brands executive Steven Laty as chief operating officer.

Almost all of Buffets’ restaurants are company owned, with the exception of 16 franchised locations—most of them HomeTown Buffets.

Prior to the bankruptcy, the company had planned to grow HomeTown Buffet as a franchise concept in Florida, Nevada, Arizona, New Mexico, Utah and eventually California, but, as of the third quarter, no new franchise agreements were reported.

The HomeTown Buffet and Old Country Buffet brands are very similar in format, offering a range of home-style dishes across three dayparts, from made-to-order omelets to fried chicken. Ryan’s buffets added grilled proteins, and company officials in recent years also have been experimenting with the addition of open-flame grills at Old Country Buffet.

The acquisition of Ryan’s gave Buffets Holdings a foothold in buffet-friendly Southern states. However, Buffets closed 34 Ryan’s units after the acquisition, primarily in Florida.

Also struggling is the segment’s smallest player in terms of market share, Ponderosa Steakhouse, a chain owned by Metromedia Restaurant Group, which also operates and franchises such casual-dining brands as Bennigan’s. Ponderosa is Metromedia’s largest chain and has remained relatively static in terms of sales, unit openings and growth in the past years.

Ponderosa, with about 280 units, currently is promoting its lunch and dinner buffets as alternatives to fast food. The chain is challenging guests to bring in a fast-food receipt to receive “a deal” on the Ponderosa buffet, although details on exact price points were unavailable. Such novel promotions exemplify full-service chains’ struggles to slow the rate at which consumers have traded down to quick-service and fast-casual alternatives in times of economic woe.

GRILL-BUFFET CHAINS RANKED BY U.S. SYSTEMWIDE SALES

Ponderosa’s slump has most recently been aggravated by its parent company’s financing troubles. Metromedia revealed earlier this month it was working with its lenders to restructure debt–sometimes a precursor to bankruptcy, and at very least a costly corporate undertaking. However, the Metromedia group emphasized that it had neither “filed for bankruptcy nor prepared a bankruptcy filing.”

Like Buffets, Metromedia revealed that it would need to restructure its indebtedness and was also suffering from reduced sales as the economy limped along. Metromedia Restaurant Group’s chief executive, Clay Dover, abruptly stepped down from that post earlier this month, citing “a difference in opinion” between Metromedia’s ownership and himself regarding a “strategic direction for the company.”

Weakness within certain of the buffet sector’s players has benefited operators of the segment’s largest individual chain, Golden Corral.

With 481 restaurants at the end of its latest year, including 107 company-owned locations, Raleigh, N.C.-based Golden Corral reported systemwide sales of $1.530 billion, up slightly from the $1.526 billion the previous year, in part because of the opening of 15 new locations.

Because of difficult economic times, Golden Corral is trying to drive home the value message by emphasizing service.

“Our operational imperative is to make a big difference in hospitality,” says Bob McDevitt, Golden Corral’s senior vice president of franchising.

The chain’s assessments of restaurants are putting more weight on service, for example, as Golden Corral revives a program called the “100 Club,” in which servers are rewarded for knowing at least 100 guests by name.

A new advertising campaign plays on the “There’s no place like home” adage with the tagline, “There’s no place like Golden Corral.”

“We’ve changed our advertising strategy to be more focused on the occasion, the family, the fun,” McDevitt says.

In 2006, Golden Corral began testing a new prototype format it calls “pavilion” stores, which feature new display-cooking stations with various themes. The Pagoda Bar offers freshly prepared Asian stir-fry options while the Piazza Bar includes Italian dishes.

The Lighthouse Bay Seafood Bar might include tilapia Florentine, jumbo shrimp or crab cakes, and the Hacienda Bar would offer tacos or fajitas.

Three pavilion units are open and two more are in the pipeline. Though McDevitt says Golden Corral still is fine-tuning the concept, the pavilion format likely will be the way of the future.

This year, Golden Corral plans to add 20 to 23 new locations, both company-owned and franchised.

With rising food costs, the chain has raised menu prices about 3 percent this year, bringing the average check to about $8.70 systemwide.

GRILL-BUFFET CHAINS RANKED BY NUMBER OF U.S. UNITS

However, the buffet concept’s matrix of more than 160 items allows room for flexibility to address rising costs of specific products, notes franchisee Eric Holm, whose Metro Corral Partners, based in Orlando, Fla., operates 26 Golden Corrals in central Florida and the Atlanta area.

At a buffet, “you’re not locked in to the menu,” he says. “If you’re just selling burgers, and costs on that item goes up, it can be more difficult.”

Holm says his units averaged $5.66 million in annual sales last year, and business has been strong.

“Grocery stores are my best friend,” he says, noting that higher retail food prices have helped bring in value-seeking customers. “You can have lunch at Golden Corral for less than the cost of two gallons of gas, and at night the buffet is cheaper than a pizza.”

At Holm’s restaurant, the buffet typically costs $7.49 at lunch and $9.49 at dinner.

Golden Corral also stands out in the buffet segment because just about everything it serves is made in house, from the freshly ground burgers to the baked goods.

“We’re such a fresh concept,” Holm says, “and fresh food is never going to go out of style.”

Up and coming in the buffet category is Garden Fresh Restaurant Corp.’s Sweet Tomatoes brand, whose restaurants carry the alternative Souplantation name in Southern California.

GRILL-BUFFET CHAINS RANKED BY ESTIMATED SALES PER UNIT

Garden Fresh, which marks its 30th anniversary in July, is owned by private-equity firm Sun Capital Partners, based in Boca Raton, Fla.

Already having 110 locations in 15 states, none of them franchised, Garden Fresh has been expanding into new markets in Texas and Illinois. Restaurant No. 111 is scheduled to open in Irving, Texas, later this year, and the company plans to open eight more units in 2009.

Prototype units that opened earlier this year in the California cities of San Jose and Simi Valley sport a new “contemporary farmers market” design with urban industrial elements. The salad bar also features a new “to go” lane for carryout diners.

Recent marketing efforts have focused on positioning Souplantation and Sweet Tomatoes as healthful lifestyle choices, including the promotion of functional-food menu items, such as açai juice and vitamin water. The restaurants use local produce where possible.

“Three decades ago, healthy dining was not as much a top-of-mind issue as it is today,” says Michael Mack, Garden Fresh’s co-founder and chief executive, noting that the company has recorded 13 consecutive years of same-store sales growth. “Early on, we found that our guests were excited to have a bounty of wholesome choices the entire family could enjoy and feel good about. It’s clear the appeal of this successful restaurant recipe is even more relevant in 2008.”

Top 100: Part one of a two-part report