Juice Craze May Be Next to Tank, Analyst Says

July 22, 2014

As the demise of Crumbs Bake Shop, and its cupcake kingdom, roils the food industry, one analyst is already predicting the next hot trend that is likely to cool off: Juices.

That’s the word from Darren Tristano, executive vice president of restaurant research company Technomic.

In a blog this week, food guru Tristano wrote that juice concepts, while “all the rage today,” are at risk of over-saturation and too much competition. The Westfield Garden State Plaza in Paramus is now home to Jamba Juice and Freshu Grill and Juice Bar.

“With health and wellness getting more play from affluent and millennial consumers, it’s clear the cold-pressed juice concepts will be pushing hard to expand,” Tristano wrote.

“Even though these concepts have price points over $10 in major markets like Los Angeles and New York, it’s clear that Hollywood-starlet impact on our country with juice cleanses is evident. Juice specialists will likely expand quickly as the fad continues but the trend will settle into concepts that represent reasonable prices for the mainstream consumer.”

He predicted that big brands such as Starbucks’ Evolution Juice and Juice It Up will have an edge in this competition.

“But ultimately, the ‘craze’ will settle down and many restaurants will likely see declines in sales that make it difficult to continue their operations,” Tristano wrote.


Crumbs Bakery Chain Closes Up Shop

July 21, 2014

When Crumbs, the New York City-based chain that built its business around cupcakes, shuttered several dozen of its remaining locations on Monday, it seemed like an abrupt ending for a company that opened a decade ago to ride the wave of popularity of the sugary treat sparked by the TV series Sex and The City.

But Crumbs’ rise and fall isn’t surprising when considering the company’s dependence on a fad. In fact, it’s the latest cautionary tale for one-item restaurants and other chains that devote their entire menus to variations of a single product.

- Krispy Kreme, for instance, expanded rapidly in large part on the cult-like following of its doughnuts. But sales started declining and the company ended up closing locations. Last year, restaurant industry researcher Technomic said Krispy Kreme had 249 locations, down from 338 a decade ago. The chain has broadened its menu more recently.

- A similar fate befell Mrs. Fields, which is known for its cookies. The chain has suffered in part because of the ubiquity of places that sell cookies, and it was down to 230 stores last year, from 438 a decade ago.

- TCBY had 355 stores last year, down from 1,413 a decade ago. Part of the chain’s problem is the competition, given the proliferation of frozen yogurt places.

Companies that only offer one item can fall victim to a number of risks. For one, trendy products tend to attract competition from big and small players that want to jump on the bandwagon. For instance, Starbucks and Cold Stone Creamery have been trying to capitalize on the cupcake trend with cake pops and ice cream cupcakes, respectively.

Being beholden to a single item also makes companies more susceptible to customers’ whims and changing tastes. There’s always a new fad. Frozen yogurt. Chopped salads. Freshly squeezed juices. Entrepreneurs may be eager to open stores selling these products, but there’s always the danger that fickle customers will move on to the next thing.

“A cupcake shop today can’t survive on just cupcakes,” said Darren Tristano, a Technomic analyst.

To combat the risks, many chains diversify their menus. And several have prospered by moving beyond their flagship products.

Dunkin’ Donuts, for instance, has been pushing aggressively into specialty drinks and sandwiches, with a focus on boosting sales after its morning rush hour. And Starbucks has introduced a range of new foods and drinks in its cafes, including premium bottled juices and salad boxes. The coffee chain even plans to expand wine and beer offering in evenings to as many as 1,000 locations over the next several years.

Magnolia, another popular New York City cupcake shop, is credited for sparking the cupcake craze after it was featured in Sex and the City.

The chain, which opened in 1996, has endured while many of the cupcake shops that opened up in its wake – including Crumbs – focused on just cupcakes. That’s in part because Magnolia, which now has 7 locations, offers a variety of desserts, including cakes, pies, cookies, brownies and banana pudding.

Sara Gramling, Magnolia’s spokeswoman, said the company is learning about the dangers of focusing too heavily on one product, as well as expanding too quickly.

“We’ll be mindful of those lessons,” she said.

Still, some chains manage to persevere by carving out a niche where there aren’t many competitors; Auntie Anne’s and Cinnabon have expanded locations over the years.

As for Crumbs, the company noted in a statement late Monday that it was evaluating its “limited remaining options.” That will include a Chapter 7 bankruptcy filing.


How Does the Cupcake CRUMB-le

July 9, 2014

pictureWas anyone surprised by the recent demise of the Crumbs Bake Shop? For those who read the Wall Street Journal article about the gourmet-cupcake crash in April 2013, or those that had invested in the publicly traded company, it should not have been unexpected.

Last April, it was clear that the “cupcake fad” was crumbling right at the time Crumbs Bake Shop was expanding locations and working hard to be the category leader in the high-growth cupcake snack segment.

So what went wrong?

With Crumbs following in the footsteps of high-flying brands like Mrs. Fields, TCBY, Cold Stone Creamery and Krispy Kreme, consumers have proven that they are very fickle about where they shop for indulgence. As more independent and regional chains of cupcakeries grew nationally, the strong demand and growth provided short-term evidence that the trend was hot and would continue. But supermarkets jumped in with significantly lower price points, and consumers began baking cupcakes at home for even less. Kids’ lemonade stands across America began offering cupcakes for 50 cents, and the obsession with this traditional classic fell flat.

Brands that rely on a narrowly focused product will have greater risk. Although In-N-Out Burger has fewer than 10 items including burgers, fries, soda and shakes, it continues to do well by expanding slowly and cautiously and staying in tune with its customer. Overall, a bakery positioning with a broader offering and strong beverage platform could have strengthened the Crumbs business model with a bigger play at lunch to complement their breakfast and snacking occasions.

How have other brands fared with more narrowly focused offerings?

Mrs. Fields brought fresh baked cookies to America and by 1993 had nearly 600 stores open in malls around the country. At a time when malls were very popular, many consumers couldn’t get enough of those chocolate chip cookies. Today, there are less than 230 locations open and some have paired up with frozen yogurt brand TCBY to provide more variety in the co-branded location.

TCBY was the original leader in fro-yo until gourmet ice cream stole the show, forcing many stores to close. TCBY peaked in 1997 with more than 2,800 locations in the U.S. Americans’ willingness to pay more for what they considered “better ice cream” was evident as many brands emerged in the premium ice cream category including Ben & Jerry’s, Cold Stone Creamery, Marble Slab and Maggie Moo’s.

Krispy Kreme’s exceptionally craveable glazed donuts became President Clinton’s favorite and soon worked their way into regular consumption across the country. Peaking in 2004 with nearly 400 units, the donut company had sales in the U.S. of over $1 billion. Then came Atkins and low-carb diet trend. Krispy Kreme’s narrow focus on donuts paired with aggressive expansion put it at risk and caused it to shutter nearly half its restaurants by 2010. Today, Krispy Kreme has continued to expand globally and has started to open new stores in the U.S., posting a year-end 2013 total unit count of 249.

Cold Stone Creamery captured the hearts and wallets of many American consumers by introducing gourmet ice cream, customized on a cold slab with mix-ins. Although the chain continues to provide frozen desserts to many Americans, it does so with far fewer locations since its peak in 2007 at around 1,400 locations. Cold Stone Creamery ended 2013 with 990 stores in the U.S.

So what are the early warning signs for when a brand or category may be at risk?

Early warning signs appear as the category becomes more competitive. Category leaders begin to slow unit expansion, and same-store sales level out. As many brand leaders push expansion nationally, they begin to see greater competition from regional chains and independents that are in tune with the local consumer base. As more regional chains expand nationally and begin to battle for share in larger markets, new locations result in cannibalization and often consumers trying new brands just to see if they are different.

Strong blocking and tackling efforts are necessary to maintain differentiation and loyalty. Customers can be easily lost if franchise and company stores don’t deliver high levels of service and quality standards.

When does a segment become mature?

Many up-and-coming categories show high growth in unit expansion that drives sales volume growth. When longer-term sales growth shifts from high growth (above 5 percent) to lower growth (below 5 percent) you can usually see that the consumer interest is plateauing or that supply has caught up with demand.

In some cases, older legacy brands may be on the decline, offsetting growth from more contemporary concepts. Or menu-category products have been introduced into other segments, such as flatbread pizza in casual dining competing with limited-service pizza or more seafood options in the steakhouse segment competing with seafood-focused restaurants. In any event, declining growth rates generally show the state of the category and where it is headed.

Which segment is hot today but at risk in the short-term?

Juice concepts appear to be all the rage today. With health and wellness getting more play from affluent and Millennial consumers, it’s clear the cold-pressed juice concepts will be pushing hard to expand. Even though these concepts have price points over $10 in major markets like Los Angeles and New York, it’s clear that Hollywood starlet impact on our country with juice cleanses is evident. Juice specialists will likely expand quickly as the fad continues but the trend will settle into concepts that represent reasonable prices for the mainstream consumer.

Expect major brands like Starbucks’ Evolution Juice and Juice It Up to have a leg up on the competition, but ultimately, the “craze” will settle down and many restaurants will likely see declines in sales that make it difficult to continue their operations.

For cutting edge trend research and results, always keep Technomic in mind!


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.


Follow

Get every new post delivered to your Inbox.

Join 136 other followers