Quiznos Moves Toward Bankruptcy Filing

February 28, 2014

Sandwich chain Quiznos is preparing to file for bankruptcy-court protection within weeks as it contends with unhappy franchisees and a $570 million debt load, according to people with direct knowledge of the matter.

Quiznos has been negotiating with creditors for weeks on a restructuring plan that would streamline its trip through bankruptcy court, these people said, but a deal hasn’t yet been reached.

The chain’s move toward bankruptcy comes two years into a major turnaround effort that included an out-of-court debt restructuring and a management shake-up. While a Chapter 11 filing would give the company much-needed flexibility on leases and unattractive contracts, the company must repair its damaged relationship with franchise owners who say they’re being squeezed out of business by the high cost of operating a Quiznos outlet.

“If a brand wants to succeed, its franchisees have to succeed,” said Darren Tristano, executive vice president at restaurant consulting firm Technomic Inc.

Thousands of Quiznos locations have shut down in recent years as the company’s competitors have opened new locations at a rapid pace. Quiznos’s world-wide store count now stands at about 2,100, while its chief rival, Subway, has 41,000.

Founded in 1981, Quiznos was considered innovative at the time with its toasted subs. But its sales have suffered as Subway offered a $5 foot-long sandwich starting in 2008 and new competitors such as Potbelly Corp. PBPB -0.84% and Jimmy John’s Franchise LLC moved into the crowded sandwich market.

In its heyday in the mid-2000s, Quiznos stores, on average, rang up $425,000 in annual sales; since then, that figure has dropped to around $300,000 for the top-performing stores and to far less at the weakest stores, according to people familiar with the matter.

Quiznos franchisees say they’re struggling to stay in business. In addition to the fees the company charges them to use its name, store operators must also buy most of their supplies and ingredients from Quiznos’s distribution business.

Franchisees long have complained that the subsidiary charges more than what they would pay to purchase those goods elsewhere.

Mr. Tristano said the fees Quiznos collects from franchisees—7% in royalty fees and another 4% for advertising—is higher than the industry average of 6% in royalty fees and 2% for marketing.

Fabian Andino opened a Quiznos franchise in 2006 in Port St. Lucie, Fla. It wasn’t long before he realized that he was paying higher prices for items like tomatoes through Quiznos’s distribution business. To save money, he bought produce from local farms but said the company charged him weekly penalty fees for not placing minimum food orders.

A person close to the company said it didn’t assess such penalty fees, but that franchisees who wanted to receive rebates for food costs were required to place minimum orders.

When Quiznos decided to offer delivery service in 2008, he recalled, franchisees were told to pay $10,000 to the company in return for signs and decals for their delivery cars and in-store inserts.

“They marketed it as though it would be the magic wand that would save the operation, but I knew it was another ploy Quiznos was using to raise more funds for them,” Mr. Andino said. “I refused.”

Mr. Andino said the company withdrew the payment request and supplied him with the materials free of charge. He said he couldn’t make his Quiznos business work and closed his store in late 2009.

“Quiznos did not have the proper name recognition or great marketing,” said John Medici, a 71-year-old retired warehouse manager in Longwood, Fla., and onetime Quiznos customer. “You have to give people the impression that your food is better than the food down the street.”

Steven Raposo said he spent a total of $350,000 to open a Quiznos franchise in Norton, Mass., in 2005. He said he and his family soon realized they wouldn’t be able to bring in enough money to cover expenses and put the franchise up for sale. They sold the business less than a year later for about half the price.

Mr. Raposo said his annual sales would have been about $600,000, but he was still facing monthly losses of between $3,000 and $5,000.

“It sounds like we were doing a lot [of business] but there was actually no profit because of food costs and labor,” said Mr. Raposo, a practicing chiropractor.

To address franchisees’ concerns, Quiznos management cut food and supply prices last summer, a person close to the company said in December. The company has also tried to improve store operations in the U.S. by making sure restaurants were clean, adding new menu items and removing slow-selling ones.

But so far, Quiznos’s turnaround efforts haven’t met expectations and the company has missed key performance targets, according to people familiar with the matter. The company also has a high debt load for its size, in part the legacy of a 2006 leveraged buyout.

Quiznos missed a loan payment at the end of 2013 and has been operating under a forbearance agreement with its lenders, which delays a potential default, as it negotiates with creditors including Fortress Investment Group FIG +1.87% LLC, Oaktree Capital Management and Avenue Capital Group, which is also its majority owner.


Cold Fusion

January 9, 2014

2014-01-09_1101In an exercise that captured the attention of category managers attending CSP’s Cold Vault Summit, consultant and former retailer Casey McKenzie of Lexington, Ky.-based Impact 21 Group asked the retailers to consider where they would place products in a fictional convenience store.

While the specific results didn’t matter—“There is no right or wrong answer,” McKenzie said— the real message was in the variety of answers.

While one group placed beer in the back-corner cold-vault doors across from a beef-jerky endcap, another put dairy in the same corner doors with bread and other grocery basics nearby. “We imagined our store was in the Northeast, where c-stores really evolved out of the dairy business,” explained the team’s leader, Nancy Knott, category manager of alcohol for La Palma, Calif.-based BP ampm. In that region, she reasoned, consumers are still drawn by bread, milk and eggs.

“That’s it!” McKenzie said. “This exercise is not just about product placement and adjacencies; it’s about what your marketing objectives are. Much of it is driven by who your customers are and what you want to be. But it can’t all be pie-in-the-sky stuff; there has to be some science behind it.”

For three days, 35 retailers from across the country put on their proverbial lab coats to consider the science and the data driving beverage sales today. Their scientific method started with a big picture: the economy and,
perhaps more important, how consumers view it.

“I think the economy is in a lot better shape than [most] people do,” said analyst Nik Modi, who follows beverage and tobacco stocks for RBC Capital Markets. Modi said the housing market is improving, U.S. gross-domestic product is growing again and the job picture is showing some progress.

Despite that, 10 of 12 major beverage categories are slowing and the majority of food categories are declining, according to Modi.

This is a matter of psychology and how consumers think about their purchases. “The internal consumer is being squeezed,” forcing them to be more disciplined in their spending, meaning less discretionary spending
on things such as beverages and fast food, he said. “Consumers are making choices.”

Also, as spending on cars and housing have increased this year, retail sales have declined.

Calorie Concerns
Meanwhile, the continuing trend toward healthier eating also has taken a toll in more ways than one.

First, there’s the move away from products—full-calorie sodas and juices—viewed as adding to the obesity epidemic in the United States.

But the real surprise is that even diet drinks, particularly low-calorie carbonated soft drinks, are hurting, indicating the next phase in the continuing move away from the CSD category.

“It comes down to health and wellness,” Modi said. Consumers are hearing a lot of negative news about low-calorie sweeteners, particularly aspartame, that’s turning them away from the category.

“Just as consumer interest in aspartame peaked (in the first quarter of 2013), diet CSD trends began to worsen, while regular CSD trends remained,” he said. “There are a lot of companies out there chasing the lowcalorie trend. I’m not sure it’s as important today as it used to be.”

For c-stores, those more indulgent beverages are still an area of growth. “Seventy percent of what I sell in my stores have nothing to do with health and wellness,” said retailer Lundy Edwards of Forward Corp., Standish, Mich.

Still, Modi and others pointed out, the trend suggests these full-calorie categories are falling out of favor with the public.

Ivan Alvarado, director of category management for Plano, Texas-based Dr Pepper Snapple Group, acknowledged that in just the past year, the average CSD set has shrunk from 14 shelves to nine in c-stores, most of it claimed by energy drinks and bottled water. “Some of this is related to health and wellness, and some of it is self-infl icted,” he said, citing beverage makers’ hesitance to innovate, and that “CSDs have not been able to communicate with millennials. New tactics are needed to reach these consumers.”

Added Clinton McKinney, group director category advisory for Atlantabased Coca-Cola North America, “If you want to be known as one of the retailers who embraces innovation, you’ve got to go all the way and let the
consumer know that’s your play with signage and other messaging.”

“It’s all about interrupting that autopilot behavior that consumers have in the store,” Alvarado said.

One challenge for retailers is the latest generation—those 21 to 35—coming of age. These millennials are less trusting of big business, making a warning message about the industry’s oldest artifi cial sweetener resonate all the more.

“They have a very low level of trust for institution,” Modi said. Instead, millennial consumers rely on their friends for recommendations, whether it’s a co-worker they see every day or a distant but respected acquaintance they  communicate with only through Facebook.

“It’s when recommendations start coming in on social media that sales really begin to improve,” Modi said.

To that end, Alvarado encouraged retailers to call out soda makers to turn things around. “Challenge us,” he said. “Every time we walk in your stores, ask us: What are you doing to sell more in my store?”

Energy’s Boost
One of the most active beverage categories on social media is energy drinks. With sponsorships of extreme-sport athletes and unique events, such as Red Bull’s Flugtag competition and Monster’s sponsorship of skating, surfi ng and snow events, the suppliers are keeping their brands in front of their key demographics’ eyes.

“Think about all the things that Red Bull does that make someone think, ‘Oh, I’ve got to post that [on Facebook],’ ” Modi said.

Still, energy-drink sales trends are slowing. The young category overall is growing by about 5% today, compared to the double-digit (up to 20%) growth of past years. The category is maturing, and consumers have taken notice of the headlines surrounding energy drinks and the pending lawsuits that claim the drinks are dangerous. Still, Modi doesn’t think that has had much of an effect on sales.

Energy-drink sales grew 8.6% in c-stores for the 52-week period ending Aug. 10, 2013, according to Nielsen data presented by James Ford, head of category and shopper insights for Red Bull North America, Santa Monica, Calif.

“The convenience channel is driving energy-drink growth,” he said. “And energy drinks will continue to be the biggest growth contributor to the beverage category through 2017 and beyond.”

C-store retailers attending the Cold Vault Summit generally agreed that energy drinks are still a bright spot in the cooler, bringing a high-margin ring to the checkout as the major energydrink makers—Monster, Rockstar and Red Bull—maintain a busy newproduct introduction pace to keep the category fresh.

The Wonders of Water
Bottled water is also gaining space in the cold vault as the subcategory continues its march toward becoming the No. 1 beverage in the United States.

The growth comes as usage occasions expand and variety increases, said Chelsea Allen, senior manager, category and shopper solutions, for Nestle Waters North America, Stamford, Conn.

“Bottled water outsells sodas in 13 U.S. markets today,” she said. “It will be the No. 1 beverage in the country in 2016.”

The opportunity for retailers is to grab as much share as possible of the category while it’s still growing.

“Smartwater is the fastest-growing brand, and private-label [water] is growing on distribution gains,” Allen said. “But … we know that brands bring people into your stores. In fact, 44% of all bottled-water households will only buy branded bottled water.”

To improve water sales, Allen encouraged retailers to offer single-serve packaging for the three main water segments: premium, popular and value waters. She also urged retailers to stock 12- and 24-packs of water. “Nearly 6 million shoppers shop in convenience stores and buy case pack water,” she said. “But only 1% of households buy case water in c-stores. It’s a real opportunity.”

Favoring Flavor
Millennials are helping change another aspect of the beverage landscape: They’re more willing to experiment with new flavors. They join the growing Hispanic demographic in a desire to sample bolder flavors. When you add millennials’ $1.7 trillion in spending power to Hispanics’ $1.2 trillion, the result is a “structural change” to the country’s palate.

“It’s the blending of America,” Modi said. “The white consumer is taking culinary cues from Hispanic, Asian and African-American consumers.”

This led Modi to suggest beverage manufacturers should focus less on low-calorie products and more on new flavors that appeal to this new desire for stronger flavors.

“We’re at a point in the United States where companies are taking ingredients out of their products” to make them seem more natural, Modi said. “Instead, there’s not enough flavor.”

The most obvious and successful evidence of this trend is in the beer and wine categories. One reason: By 2018, 80 million millennials will be of legal drinking age, and 20% of millennials are also Hispanic, according to Darren Tristano, executive vice president of Chicago-based Technomic Inc.

For wine, the move has been toward mixing varietals to create new flavors and indulging the millennial consumers’ sweet tooth.

“The millennial doesn’t want to drink what their parents drink,” said George Ubing, national director of the convenience channel for E. & J. Gallo Winery, Modesto, Calif. For Gallo, the goal of turning wine into a more refreshing beverage has prompted innovation. Leading the way are Barefoot’s lighter, more thirst-quenching line extensions Refresh, Moscato and Bubbly; and a Liberty Creek wine packaged in a Tetra Pak to target on-the-go lifestyles.

Beer’s story has been told many times: The growth is in “better beers”—imports, crafts, higher-end brews from major brewers—as consumers seek more flavor and diversity, even at greater expense.

“There’s a definite shift away from domestic beers,” said Tristano. “Today, it’s craft beers, cider and imports that are growing. When they become too popular, that’s when millennials say, ‘Wait a minute. I want to try something different.’ ”

That, to Modi, is an opportunity. Their willingness to experiment and try new flavors gives retailers permission to “reduce the SKU capacity, but supply newness,” he said. That is, don’t feel the need to stock every variation on a subcategory; instead, stock the most popular and the newest to maintain the fastest-selling brands while providing customers the ability to experiment.

This theory is backed by research that shows a balanced beer portfolio is the most successful way to grow overall beer sales, as outlined by Dean Zurliene, St. Louis-based Anheuser-Busch’s senior director of category management.

“There’s a lot of shifting in the beer mix today,” Zurliene said. “When retailers manage it from a balanced approach—emphasizing both premium beers and crafts—they win 93% of the time.” One reason is the beer buyer’s likelihood to buy both craft and premium beers or spend money on both segments.

“More often than not, someone who drinks craft beer also drinks premium beer, also drinks value beer, and also drinks import beer,” he said. “The craftbeer shopper only spends 32% of their beer money on craft beer.”

This data falls in line with research on the millennial consumer, too. “Millennials are not the most brand-loyal consumers,” said Adrienne Nadeau, senior researcher for Technomic. “They crave variety.”

And providing that variety can be a long-term win for retailers, Tristano agreed. “It’s not loyalty to millennials; it’s frequency,” he said. “If you build the frequency, the habit with this generation, you can grow with them.”


Hearty Appetite for Fast Casual

November 7, 2013

The Potbelly restaurant on State Street still hummed with customers, long after a recent lunch hour had ended.

Tyler Andersen, a 20-year-old accounting student at nearby Harold Washington College, paid $10 for chips, a drink and a Wreckingball, a fusion of the restaurant’s popular Wreck sandwich — made with roast beef, turkey, ham and salami — and a meatball sandwich. He said he prefers dining at Potbelly over other sandwich shops like Subway and McDonald’s.

“I’d rather spend one-fifty or two dollars more because I like the product better,” Andersen said. As for fast food, “I can’t justify paying six or seven bucks. I’d rather spend 10 bucks here than four bucks at McDonald’s.”

Whether investors will retain their appetite for Chicago-based Potbelly remains to be seen.

Shares more than doubled in value in their debut Oct. 4, rising from $14 apiece to close at $30.77. Not bad for a company that started out in 1977 as an antique shop on Lincoln Avenue and began offering sandwiches to increase sales. It now counts 280 company-owned shops in the United States.

But shares have slipped since then; they closed Monday at $26.21, down nearly 6 percent, or $1.60 a share. Analysts point to a report over the weekend by Barron’s that questioned the shares’ lofty valuation.

Potbelly competes in the fast-growing restaurant segment known as fast casual, where made-to-order offerings like a Subway sandwich, Panera salad or Chipotle burrito are drawing busy, money-strapped consumers from more expensive casual dining restaurants like Chili’s and Olive Garden as well as less expensive restaurants like McDonald’s and Burger King.

“The millennial generation really likes fast-casual restaurants and are willing to spend a few more dollars,” said Darren Tristano, executive vice president at food industry research and consulting firm Technomic. “They are not as frugal as Gen X or boomers.”

Tristano said the fast-casual sector represents $35 billion in annual sales and has quickly grown, even through the recession. Tristano expects a 10 percent annual growth rate for the sector to continue for at least the next five years. The typical Potbelly check averages between $8.50 and $12, compared with $3 to $8.50 at a fast-food restaurant, according to company documents.

Company officials declined to comment.

Analysts had been comparing demand for Potbelly’s initial public offering to that of Colorado-based Noodles & Co., also in the fast-casual sector. Shares of Noodles & Co., the first U.S. restaurant IPO this year, also more than doubled in value in their trading debut in June. The stock was priced at $18 and closed Monday at $48.30. Noodles serves globally inspired noodle dishes ordered at the cash register.

Francis Gaskins, director of research at Santa Monica, Calif.-based Equities.com and founder of IPOdesktop.com, said he expects Potbelly to use the net proceeds from its offering to grow into a national brand. Potbelly operates in 18 states and the District of Columbia.

“I personally think it’s got to grow into its valuation,” Gaskins said. “If they can’t open profitable stores on a consistent basis, that’ll be a problem for the stock.”

Gaskins said the challenge for Potbelly will be to distinguish itself from the myriad sandwich chains with which it will compete as it expands.

R.J. Hottovy, senior restaurant analyst for Morningstar, notes that Potbelly is in a market saturated with sandwich competition “and that is something investors have to be mindful of.” Aside from well-known brands Subway and Quizno’s, there’s Jimmy John’s, Jersey Mike’s, Schlotzky’s, Jason’s Deli, Firehouse Subs and smaller chains.

This year Potbelly plans to open 32 to 35 shops, the company said in a regulatory filing. That compares with 31 stores in 2012 and 21 in 2011.

Revenue in 2012 rose 15 percent to $274.9 million, up from $238 million in 2011. Aided by a tax benefit of $16.9 million in 2012, net income was $24 million. That compares with earnings of $7.2 million in 2011.

Potbelly prides itself on its ambience. A potbelly stove usually is prominently displayed, and live music is provided at most stores during lunch. Its rustic decor is reminiscent of its roots as an antique shop.

Customers in the Potbelly on State Street listed ambience as a factor that draws them back.

“It’s open, and they play music, and it’s really relaxed and has cool stuff on the wall,” said Karen Chavez, a vegetarian who usually stops at Potbelly’s once a week. She says she picks up a Potbelly meatless sub and a canned drink for $5. Cookies and shakes also are a draw, she said.

“I feel like the ingredients are better and the options are better,” she added.


Starbucks Petition Urges Lawmakers to Wake Up, End Shutdown

October 25, 2013

Screen-Shot-2013-10-11-at-10.03.31-AMStarbucks on Friday kicked off a petition drive to mobilize its customers and other businesses in hopes of ending the federal government shutdown.

“Please join us in doing what you—and your companies—can to give the American people the voice they currently lack, and are desperately crying out for,” Starbucks CEO Howard Schultz wrote in a letter posted on the company’s website. “And in the process, you can help to restore faith and trust in our government through your civil words and deeds.”

By mid-morning Friday, more than 200,000 people had signed on, Schultz said during an appearance on CNBC’s “Squawk on the Street.”

Within the past 48 hours, Schultz has spoken with more than half of the CEOs of companies listed on the Dow 30, he said. They all were consistently disgusted with the situation, he added.

“I’m saying enough is enough,” Schultz said.

The petition comes as Americans’ frustration with Washington politicians is high. A new NBC News/Wall Street Journal poll found that 60 percent of Americans would opt to throw out every member of Congress at once if possible.

The Starbucks petition states: “To our leaders in Washington, D.C., now’s the time to come together to: 1. Reopen our government to serve the people. 2. Pay our debts on time to avoid another financial crisis. 3. Pass a bipartisan and comprehensive long-term budget deal by the end of the year.”

Starbucks is urging like-minded individuals to sign the petition online or to bring it into a Starbucks. They can also sign up for email or text updates, share them on social media and download a badge for their social sites. By Friday morning, the Starbucks post on Facebook had more than 70,000 likes.

Earlier this week, the Seattle-based coffee chain started with a soft-sell campaign, urging customers to “pay it forward” by buying a coffee for another customer. Starting Friday, the company added to those efforts by stocking its stores with petitions, asking politicians to wake up to the people’s wishes.

“I think Starbucks has a lot of guts to be the first ones to get involved,” said John McCourt, a graduate student at New York University, who is documenting his quest to visit every one of the coffee chain’s outlets in Manhattan. On Friday morning, he had already signed the petition and bought coffee for another person at an Upper East Side Starbucks.

“I think the petition is an evolution of the pay-it-forward. The pay-it-forward was asking people to be nicer to each other, to be more civil to each other. Three days later, nothing happened, so now we have the petition,” McCourt said.

Although mixing politics with business can have negative repercussions for some companies, this campaign is right in line with Starbucks brand and identity, said Darren Tristano, the executive vice president at Technomic, a food industry research and consulting firm.

“It really fits in with the Starbucks philosophy. They’ve always done things with a strong corporate responsibility,” Tristano told CNBC.

Schultz has weighed in on high-profile political issues before, including a plea for Starbucks customers to leave their guns at home and a 2011 call for people to stop making political contributions until lawmakers reached a deal on the U.S. debt and spending.

“In my mind it’s also a promotion for the brand,” Tristano said. “I think what it’s showing is this brand cares enough to help other people. Why can’t the government work harder to help out citizens?”


Family Restaurants a Casualty to Casual

October 8, 2013

Gene_Kasapis_Sr_and_Gene_Jr.jpg&MaxW=620&v=201310071326When Gene Kasapis Sr. opened the first Ram’s Horn restaurant in 1967 in Greektown, family dining was one of the largest segments of the restaurant industry.

Since reaching an apex six years ago, sales at Southfield-based Kasapis Bros. Inc. have been declining, falling from $44.8 million in 2007 to $35.6 million in 2011.

But Kasapis Sr. and his son Gene Kasapis Jr. are hoping a modern restaurant design and an updated menu will become prototypes for change as the once-thriving restaurant chain looks to regain its popularity.

Like many family restaurants, Ram’s Horn has battled increased competition from fast-casual chains, burger joints and sandwich shops — even family-friendly taverns.

The elder Kasapis said sales are slowly getting better, but he also attributed local economic conditions as an added challenge.

“Are we picking up? Yeah. But are we anywhere near we were in 2007? No,” Kasapis said. “Every recession, we come back stronger than before. In our 50-year history, this is the longest recession.”

Kasapis said he has a simple solution for the declining sales: “More people need to get back to work.”

There are 19 Ram’s Horn restaurants, seven of which are corporately owned.

While Kasapis Sr. said he has no plans to begin selling alcohol at any of his Ram’s Horn locations, the chain is fighting back with new menu items and a new décor for its locations in Livonia and Dearborn.

The new layout features open ceilings, new carpet, new lighting and flat-screen TVs.

Kasapis said the new design costs between $300,000 and $550,000 per location, adding that the company will retrofit existing restaurants with the new décor as needed but is in no hurry to do so.

“We are trying to make our restaurants more appealing to younger people,” Kasapis Jr. said. “We have to change with the times.”

Conversely, Joe Vicari, president and CEO of Warren-based Joe Vicari Restaurant Group, which includes four Country Inn restaurants, said he saw a 10 percent spike in sales during the height of the recession at his Country Inn restaurants, but it was short-lived.

“That has since settled,” Vicari said. “Sales from this year over last year have been flat.”

Vicari said average weekly sales at the family restaurants range from $30,000 to $35,000, about the same as when he opened his first Country Inn in 1987.

“When you take into consideration increased operating costs, we should be doing $40,000 or more in sales per week,” he said.

Vicari was once a Ram’s Horn franchisee and owned two restaurants, but said he ended his relationship with the brand in 1997.

“It was good to get involved with Ram’s Horn when they were at their peak,” he said. “I learned a lot about the restaurant business from them, but as I got older and wiser, I wanted to go out on my own.”

Darren Tristano, executive vice president of Chicago-based food industry research firm Technomic Inc., says there is more to deflated family restaurant sales than a stubborn economy.

In fact, Tristano said, sales are declining across the board in the family-style restaurant segment of the industry.

The main culprit, he said, is the emergence of fast-casual restaurants and changing consumer tastes.

“Family dining has been flat for a decade,” Tristano said. “Casual dining, and fast casual dining, hit a growth spurt in 2005 and that momentum has continued.”

Tristano said the fast-casual segment will generate about $35 billion this year while family-style dining will generate about $40 billion.

But Tristano said those numbers can be deceiving.

“Fast casual has been a small segment that is quickly growing, while family-style dining has, on a nominal basis, been flat,” Tristano said. “In fact, when adjusted for inflation, family dining has been down.”

Tristano said family dining peaked in the 1990s, before fast-casual restaurants like St. Louis-based Panera Bread Co. and Denver-based Chipotle Mexican Grill Inc. entered the marketplace, which proved more attractive to younger diners.

“What family dining is facing is, you have older generations continuing to age and younger ones that feel too young to go to them,” Tristano said. “There has to be a shift in the category to get relevant to younger consumers. So far, that has not happened.”

Jason Nies, owner of The Hills City Grille, grew up around the Ram’s Horn brand; his father was a franchisee.

Nies said he saw the decline in family dining and decided to stay away from the segment when he began planning the first Hills City Grille, in Rochester Hills.

“I saw that trend going down 10 years ago,” Nies said. “The clientele was getting older and moving on, so I felt like it was a segment that was on the decline versus one on the rise.”

Nies opened the first Hills City Grille in 2007 as more of a tavern than a family restaurant.

But when he opened a second location, in a former Ram’s Horn in Troy, he did so with family diners in mind.

Troy’s Hills City Grille is a hybrid; it serves breakfast, lunch and dinner but each part of the day is geared toward a different segment of the population.

Nies said breakfast attracts older guests, while lunch fills up with stay-at-home moms and business professionals.

Nies said the strongest part of the day is dinner, when young parents with children make up more than 60 percent of his customer base.

After 10 p.m., Hills City Grille turns into a bar complete with live music and craft drink specials.

“Where are families going? They are going to the taverns and places with similar atmospheres. Places that serve beer and wine with dinner,” Nies said.

Nies said he expects sales at the restaurant to reach $1.5 million this year.

“It’s pretty unique to be able to hit all of the dayparts effectively and have a venue that permits that,” he said.


Friendly’s Puts on its Sundae Best

October 1, 2013

0927_ExecPro-Maguire, John2 304As a Weymouth native, John Maguire spent a lot of time at Wilbraham-based Friendly’s restaurants while growing up.

“It’s where I hung out with pals,” Maguire said. “There are so many great memories of the brand. It’s an institution.”

Now a little over a year into his tenure as CEO of Friendly’s, Maguire has been tasked with bringing the chain back to its once-iconic status. Friendly’s has had a tough go of it in the 21st century. About 100 restaurants have been shuttered since the company filed for bankruptcy in October 2011, and the chain now has 380 locations. A 2012 Consumer Reports survey showed Friendly’s received poor marks in cleanliness and customer service.

But the company’s emergence from bankruptcy in early 2012 presented it with an opportunity for a new start. And as part of that reboot, Maguire was brought on to lead the chain in April that year. Maguire, 47, left his post as chief operating officer at Panera Bread for the opportunity. He had been with Panera for 19 years — and his experience there has informed his early days in the effort to turn Friendly’s around.

“I wasn’t planning on leaving Panera,” Maguire said. “What intrigued me about Friendly’s was that I watched it decline firsthand. … I asked myself, ‘Should Friendly’s continue to exist?’ I started doing research on the brand … and decided there’s no reason it shouldn’t exist.”

Panera spent the 2000s moving in the opposite direction of Friendly’s. Its growth — the chain now boasts more than 1,600 restaurants and has added 500 since the financial crisis — can largely be attributed to Maguire, Panera executive vice chairman Bill Moreton said. “John has a core understanding of both customers and employees,” Moreston said. “He knows that the best way to serve a customer’s needs is by helping associates understand what associates do.”

That appears to be Maguire’s modus operandi at Friendly’s. The company’s top current initiative, he said, is to improve customer service, in part with a new employee training program. “We’ve hired people in the past who haven’t been so friendly,” Maguire said. “We set a higher standard than most brands (for service) with the name on our sign.”

Before Panera, Maguire worked for Wonderbread and Bread & Circus supermarkets. Those manufacturing and retail experiences have also informed his early days at Friendly’s, whose retail ice cream products have thrived while the restaurants have declined. Friendly’s ice cream is now sold in more than 8,000 grocery stores nationwide and has seen a 20 percent year-over-year sales increase in the last two years, Maguire said.

Maguire said 70 percent of Friendly’s customers order dessert, compared to just 6 percent at restaurants nationwide. “You’ve got to make sure people clearly understand what differentiates us,” he said.

Meanwhile, the company has brought more focus to the rest of its menu. Since joining the company, Friendly’s has dropped several items, such as quesadillas, steak tips and stir fry. Instead, the chain is working to improve on the quality of its classic offerings. For instance, it has begun making the Fishamajig with haddock rather than pollock.

Friendly’s is also remodeling its restaurants as part of the effort to address past complaints about cleanliness. The company has remodeled 40 of its restaurants, will remodel 10 more before the end of the year, and will eventually bring a facelift to all of its locations nationwide.

Restaurant consultancy Technomic said consumers have approved of the changes so far. Customer satisfaction at Friendly’s spiked in the fourth quarter of 2012, though it has tempered since. Technomic analyst Darren Tristano compared the Friendly’s comeback attempt to Little Caesars’. In the early 2000s, the pizza chain began expanding again after introducing higher quality ingredients and remodeling its restaurants.

Maguire said total revenue at Friendly’s grew in 2012 and is projected to grow again in 2013. Meanwhile, Maguire said, there are plans to open at least two new restaurants in Eastern Massachusetts — the company’s strongest market — in 2014.


Restaurants Hope Tax Refunds Bring Customers

June 5, 2013

100579647-starbucks-line-gettyp.240x160Payroll tax increases and high gasoline prices have pushed consumers to dine out less. But tax refunds, which are rolling in, may bring relief to the limping restaurant industry.

“Payroll tax takes its negative toll. Starting February consumers have less money — low- and middle-income groups,” said Darren Tristano, a restaurant industry analyst at Technomic, a market researcher.

The payroll tax was raised in January two percentage points to its previous level from 2010. 

According to research from the National Retail Federation that was released in February, nearly three-quarters of Americans said they’re adjusting spending because of the payroll tax change. Plus, 16 percent of those surveyed said they’re eating out less, and 15 percent are using coupons more often, according to the retail group.

Rising fuel prices have hit restaurants even harder. More than 37 percent of those surveyed said they’re eating out less because of the gas prices, according to a separate survey from the retail group.

Value is King

Given tighter wallets, it’s no surprise consumers are looking for more value, said Tristano of Technomic. Pizza and burger chains will likely grow further during the next few months as they offer more value. Tristano sees a slow growth of 1 percent (adjusted for inflation) for the restaurant industry in 2013.

“Hopefully those tax returns coming in will give us a boost in terms of sales,” said Tristano, “Enough to offset, perhaps, the impact of the payroll tax.”

With fuel prices forecast to climb further, dining out will be trickier for consumers. But restaurants catering to more wealthy customers won’t be hit as hard by payroll tax fluctuations, the analyst said.

Starbucks

Analysts see few attractive stocks in the restaurant industry at the moment, but Starbucks is one of them. Unlike fast-food chains that offer coffee for as little as a buck, Starbucks customers are willing to shell out several dollars for beverages.

“One of our favorite stocks in the industry is Starbucks, which has a luxury of catering to more affluent customer base that probably is not as sensitive to the payroll tax issue,” said RJ Hottovy, director of consumer equity research at Morningstar.

Starbucks also benefits from a variety of high-margin products available at grocery stores. Starbucks sells baked goods. The company acquired juice business Evolution Fresh and tea company Teavana. That diversified business model sets them up for growth, Hottovy said.

As Starbucks builds its growth strategy, consumers seem to be recovering from the payroll tax hike that gained two percentage points.

“When a 2 percent payroll tax went into effect in February of last month, the entire retail and consumer category — in terms of consumer behavior — was modified as a result of that 2 percent,” Starbucks CEO Howard Schultz told CNBC’s “Closing Bell” this week. “We have since, and I think others have seen it, come back,” he said.

Other Restaurants Picks

Sector analysts like other restaurant picks. Hottovy of Morningstar said Yum! is a slightly undervalued stock. Yum! is growing in emerging markets markets such as China, India and South Korea, he said. Yum! brands include KFC, Pizza Hut and Taco Bell.

Some consumers may trade down to lower price restaurants like McDonald’s if they continue to feel the impact of the pay roll tax, but the share price of McDonald’s reflects it already, he said.

Darden restaurants — including Red Lobster and Olive Garden — on Friday reported its third-quarter earnings of $134.4 million, down 18 percent from the previous year. Revenue of $2.26 billion gained 5 percent from a year ago period. The restaurant group had lowered its profit forecasts for the third quarter back in February, when several restaurants had revised their guidance as well.


Old Casual-Dining Chains Stuck in the Middle Restaurants like Applebee’s and Chili’s Squeezed from Above and Below as Tastes, Income Change

June 3, 2013

Casual dining is in the throes of a midlife crisis.

A quarter-century ago, consumers feasted on unlimited breadsticks and big desserts at Applebee’s, Olive Garden and Chili’s. Today, many Americans are trading those restaurants in for cheaper, faster fare or splurging a bit for a trendier experience.

Midprice sit-down restaurants — known in the industry as casual dining — have seen on average about 2 percent fewer customer visits each year since 2008. That translates to a total drop of almost 600 million annual visits, to 6.4 billion in 2012.

“They’ve been around quite a while, and … many of them have not stayed as relevant in meeting consumers’ wants and needs of today,” said Bonnie Riggs, a restaurant analyst with NPD Group.

The world’s largest casual-dining company, Darden Restaurants, has been hit especially hard. Company executives cut sales and earnings expectations last month, acknowledging to analysts their major brands such as Olive Garden and Red Lobster have suffered because they’ve been too slow responding to shifts in how Americans eat out.

“It is clear to us that, given our current business situation, we are indeed in a new era,” Chief Executive Officer Clarence Otis told analysts.

Applebee’s and IHOP owner DineEquity reported declining traffic at both brands for its fourth quarter, while Chili’s parent Brinker International toned down its profit forecast.

“We know casual dining is not the bright, shining star that it used to be,” Brinker Chief Executive Officer Wyman Roberts told analysts.

Tony Roma’s has dwindled from 157 U.S. restaurants to 40 during the past decade — though the company says it’s still opening new locations.

The industry is trying to reinvent itself with lower-price meals that are quicker and more healthful.

Darden said recently it plans to speed up Olive Garden’s lunch service, jump on culinary trends more quickly, attract younger diners with more technology and lure back lower-income customers with good deals.

Americans cut dining-out budgets dramatically during the economic downturn, from which many haven’t fully recovered.

“It’s a lot of money” to dine out at Red Lobster or Romano’s Macaroni Grill, said Jhonatan Arias, 26. “If you have the money to sit down and splurge, then we go to a place like that.”

Last week, he took a noontime break at Tijuana Flats, a “fast-casual” chain that has gobbled up customers at a steady pace.

Visits to those restaurants, which include Chipotle and 4 Rivers, rose by 8 percent last year compared with 2011, according to NPD Group.

Fast-casual restaurants sell fare that’s a step up from fast food. But customers still order and pay at the counter.

“It’s quick. It’s easy. It’s less expensive,” said Fraley Sadlo, who frequents Tijuana Flats and Einstein Bros Bagels with her sons.

Applebee’s is testing a lunchtime express service in its hometown of Kansas City, Mo. Customers can order and pay at kiosks, so they don’t have to wait for servers to bring checks when they’re done.

The old chains are getting threatened by new “polished casual” restaurants.

Places such as The Cheesecake Factory appeal to younger, more affluent diners who “want something new, contemporary, more social and more exciting,” said Darren Tristano, executive vice president of research company Technomic.

In recent years, Darden has been moving in the same direction, launching Seasons 52 in 2003 and now acquiring Yard House, an upscale bar and grill chain.

Restaurants that stay with the traditional model risk losing customers such as Sadlo, the mom who visits fast-casual places with her kids.

For date night with her husband, she moves up to more-expensive, often independent restaurants.


Trendier Fare Takes Bite Out of Casual Dining

May 24, 2013

os-os-olive-garden-changes018.jpg-20130302Casual dining is in the throes of a midlife crisis.

A quarter-century ago, consumers feasted on fried appetizers, unlimited breadsticks and big desserts at Applebee’s, Olive Garden and Chili’s. Today, many Americans are trading those restaurants in for cheaper, faster fare or splurging a bit for a trendier experience.

Midpriced, sit-down restaurants – known as casual dining in the industry – have seen on average about 2 percent fewer customer visits each year since 2008. That translates into a total drop of almost 600 million annual visits, to 6.4 billion in 2012.

“They’ve been around quite a while and … many of them have not stayed as relevant in meeting consumers’ wants and needs of today,” said Bonnie Riggs, a restaurant analyst with research company NPD Group.

The world’s largest casual-dining company, Orlando, Fla.-based Darden Restaurants, has been hit especially hard. Company executives cut sales and earnings expectations last month, acknowledging to analysts their major brands such as Olive Garden and Red Lobster have suffered because they’ve been too slow responding to major shifts in how Americans eat out.

“It is clear to us that given our current business situation, we are indeed in a new era,” Chief Executive Officer Clarence Otis told analysts.

Other companies have experienced similar turbulence. Earlier this month, Applebee’s and IHOP owner DineEquity reported declining traffic at both brands for its fourth quarter, while Chili’s parent Brinker International toned down its profit forecast.

“We know casual dining is not the bright, shining star that it used to be,” Brinker Chief Executive Officer Wyman Roberts told analysts.

Tony Roma’s has dwindled from 157 U.S. restaurants to 40 during the past decade – though the company says it’s still opening new eateries.

The industry is trying to reinvent itself with lower-priced meals that are quicker and more healthful. Darden, for example, said last week it plans to speed up Olive Garden’s lunch service, jump on culinary trends more quickly, attract younger diners with more technology and lure back lower-income customers with good deals.

The economy has played a major role in slowing sales. American budgets are taking one hit after another – most recently from increased payroll taxes and rising gas prices.

Americans cut their dining-out budgets dramatically during the economic downturn, from which many in the middle class haven’t fully recovered.

“Many consumers have had to adjust to having less … and spending less,” said a recent report from NPD Group, noting that nearly 75 percent now consider their spending cautious. So when they eat out, they are often finding cheaper alternatives.

“It’s a lot of money” to dine out at Red Lobster or Romano’s Macaroni Grill, said Jhonatan Arias, 26, of Altamonte Springs, Fla. “If you have the money to sit down and splurge, then we go to a place like that.”

Arias and his girlfriend usually eat dinner at home, and he often grabs fast food for lunch. He recently took a noontime break at Tijuana Flats, one of the “fast-casual” chains that have gobbled up customers at a steady pace.

Visits to those restaurants, which include brands such as Chipotle, rose by 8 percent last year compared with 2011, according to NPD Group.

Fast-casual restaurants sell fare that’s a step up from fast food. But customers still order and pay at the counter, making meals quicker and cheaper than at sit-downs.

“It’s quick. It’s easy. It’s less expensive,” said Fraley Sadlo of College Park, Fla., who frequents Tijuana Flats and Einstein Bros. Bagels with her two young sons.

Applebee’s is borrowing a page from the competition’s playbook, testing a lunchtime express service in its hometown of Kansas City, Mo. Customers can order and pay at kiosks, so they don’t have to wait for servers to bring checks when they’re done.

If that test is successful, analyst Mark Kalinowski of Janney Capital Markets expects Darden and other companies to mimic it. Darden wouldn’t say whether it is considering the idea, although company leaders say Olive Garden is trying to “streamline” takeout.

The more-established chains are getting squeezed by lower-end competitors, but newer, “polished casual” restaurants also are posing a threat. They are a tad more expensive but have more sophisticated food, decor and drinks.

Places such as the Cheesecake Factory appeal to younger, more affluent diners who “want something new, contemporary, more social and more exciting,” said Darren Tristano, executive vice president of research company Technomic.

In recent years, Darden has begun looking to a stable of these newer brands to fuel growth. Its Specialty Restaurant Group includes newly acquired Yard House, an upscale bar and grill, and Seasons 52, launched in 2003.

The older chains will find themselves at a fork in the road, Tristano said, where they’ll have to either morph into something more upscale or become quicker and cheaper.

Those who stay with the traditional model risk losing customers such as Sadlo, the mother who visits fast-casual places with her kids.

For date night with her husband, she moves up to more-expensive, often independent restaurants.

“We don’t do the sit-down chains,” she said. “They’re middle-of-the-road.”


Doubling Down on the Dollar Amid a Rare Sales Decline

May 21, 2013

On a recent lunch break, John Kurzatkowski was enjoying two McDouble cheeseburgers, fries and a large Coke at a McDonald’s.

“I like that they’re $1,” Kurzatkowski, 31, said of the cheeseburgers, which he buys about twice a week. While the physician recruiter doesn’t think price is everything, he concedes it’s a factor.

“I noticed that Wendy’s (burgers) went to $1.19,” he said. “And I noticed I went there less often.”

Kurzatkowski is the quintessential customer McDonald’s can’t afford to lose.

In the midst of its first soft sales patch in nearly a decade, the burger giant is re-emphasizing its Dollar Menu, a 10-year-old feature that became the linchpin of the last turnaround in its U.S. business. The chain is shifting ad dollars to products for $1 and introducing new items to what’s been a relatively staid assortment, including the two-patty McDouble, a fried chicken sandwich, yogurt parfait and side salad.

Analysts credit the renewed focus on the Dollar Menu with slowing what could have been a more rapid sales decline, but they underscore that the environment is more competitive than ever.

Burger King and Wendy’s are hitting hard on value and advertising premium items. The key for McDonald’s, experts say, will be introducing compelling new products at attractive prices that keep customers like Kurzatkowski coming through the doors.

“We’re aware that consumers are a little unsettled right now,” said Neil Golden, chief marketing officer of McDonald’s USA. “Whether that’s higher gas prices or just overall not having as much week to week, we know the consumer is looking for great values in everything they’re doing in the food arena.”

Although Dollar Menu sales generally comprise just 13 to 15 percent of McDonald’s sales, the offerings do drive traffic to stores, where customers sometimes buy a more expensive product.

“There are those consumers who will make purchases on the Dollar Menu and those customers that are motivated by Dollar Menu (to come in) and see other options that are more appealing to them that day,” Golden said.

Take Jerry Pitt, who stops into McDonald’s for lunch a few times a week. He says it’s the parfait on the Dollar Menu that keeps him coming.

“It’s the only fast-food place you can get yogurt and blueberries,” he said. On a recent visit, Pitt ordered his usual parfait with a McChicken sandwich, both from the Dollar Menu, but he also succumbed to an upsell for $2.99. “I added a Filet-O-Fish,” he said.

Leading up to the sales decline in October, critics say, McDonald’s did not have enough new products in 2012. With a number of new items in the wings for 2013, such as a McWrap sandwich, and other items in test, such as chicken wings, the current Dollar Menu focus likely gives the chain some breathing room.

Industry experts have backed McDonald’s strategy.

“By focusing on the dollar menu, it is helping them drive traffic back into the restaurants,” Morningstar analyst R.J. Hottovy said of McDonald’s fourth-quarter same-store sales, which just beat his expectation of flat performance.

McDonald’s, based in the Chicago suburb of Oak Brook, created its Dollar Menu as part of a turnaround plan, beginning in early 2003, after the chain had reported its first quarterly loss.

Darren Tristano, executive vice president of Technomic, described value menus as “a necessary evil” in today’s competitive environment. The three big burger chains would have to collude to end burgers for $1, he said, because “if one stopped, the others would gain that business.”

“There really is magic in the dollar price point,” said one McDonald’s franchisee who declined to be identified. “When you go away from it, it’s harder to communicate, because it’s no longer as simple as saying we’ve got Dollar Menu every day.”

Rodrick Johnson, 22, visits a McDonald’s about once a week with girlfriend Ashanta McKenzie. Once daily customers, the couple cut back, in an effort to eat healthier. Johnson said he wouldn’t stop going to McDonald’s even if it didn’t have a Dollar Menu.

“Just less often,” he said. “Maybe every other week.”


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