Asian Concepts Poised for High Unit rowth this Year

November 25, 2014

New data from Technomic forecasts a 2.3-percent unit growth rate over 2013 among the 500 largest US restaurant chains.

According to a news release, this will be slightly higher than the 2.1-percent growth rate from 2012-13 and much higher than the 0.5 percent rate in 2009.

The unit growth is rising in both the full and limited-service segments. Technomic EVP Darren Tristano said fast casual concepts will continue to show high levels of unit growth, as well limited and full-service Asian concepts. Among full-service restaurant menu segments, Asian will increase units by 5.1 percent, followed by seafood (3.9 percent) and steak (3.4 percent).

Asian/noodle also leads the limited-service menu segments, increasing unit counts by 8 percent, while bakery cafes and coffee cafes will grow units by 5.2 and 4.2 percent, respectively.

Many full-service brands have positioned themselves to expand this past year. The largest growth has been at Buffalo Wild Wings, which will have added 65 units, Mellow Mushroom (32 units) and LongHorn Steakhouse (24 units), according to Technomic.

In limited service, Subway will add 908 units by year-end, followed by Starbucks (443), Jimmy Johns (350) and Dunkin Donuts (291).

Fast casual to continue double-digit sales bump
Additionally, limited-service restaurants are expected to gain a sales bump of 3.5 percent. Fast casual chains should experience a 10.8-percent increase in sales, while quick-service chains increase 2.3 percent.

Full-service restaurants will experience a 2.5 percent sales increase in 2014, similar to the 2.4 percent increase in 2013.

Fine dining is expected to continue its post-Recession rebound, with a 5.8-percent sales increase. Casual and midscale restaurant growth will be nominal, at 2.8 and 0.5 percent, respectively.

Q3 traffic gains at Mexican concepts
Additionally, research from The NPD Group analyzed Q3 consumer traffic at US restaurants, and shows an increase in the fast casual segment, as well as at coffee/donut/bagel concepts and Mexican concepts.

Fast casual restaurants posted an 8 percent gain in traffic across all dayparts compared to same quarter year ago. Visits to Mexican quick service and coffee/donut/bagel concepts grew by 5 percent, according to NPD’s foodservice market research.

Conversely, hamburger quick-service traffic, which represents the largest share of quick service visits at 23 percent, declined by 3 percent compared to same quarter year ago. Visits to both sandwich concepts and Asian quick-serve restaurants were down 1 percent.

Although total industry traffic was flat in the quarter, consumer spending rose 3 percent in the July/August/September quarter due to average eater check gains. Check and dollar gains are in line with food away-from-home inflation. Dealing/discounts are still supporting traffic with visits on a deal up 4 percent compared to a decline in non-deal visits.

“Although total traffic is flat, the visit growth in the fast casual, coffee/donut/bagel, and Mexican QSR shows that consumers still have an interest in going out to restaurants,” NPD analyst Bonnie Riggs said in a news release. “Those restaurant concepts that are meeting the needs of today’s foodservice consumers will win their visits.”


Buffalo Wild Wings Soars Under Sally Smith

November 24, 2014

By Nancy Gondo, Investor’s Business DailyUntitled-1

When Sally Smith worked as a waitress during college, she had no idea that she would one day run a big, national restaurant chain.

“It was really hard work — balancing, having four or five tables, so time management, remembering things — that hospitality component,” she told IBD. “It was not for a long period of my life, but having that, I have a lot of empathy for what happens at every restaurant.”

That experience has been one of the factors helping her lead Buffalo Wild Wings from a 35-restaurant chain 20 years ago to a 1,050-location behemoth in America, Canada and Mexico, with annual revenue of nearly $1.5 billion.

The stock has rocketed alongside that growth — by a stratospheric 1,300% since its IPO in 2003.

“Sally has maintained a consistent performance and track record in an industry where executive leadership turnover has been very high,” said Darren Tristano, an executive vice president at food-industry tracker Technomic. “Retaining key leadership team members and with consistent strategic planning and execution, she has built a solid foundation for success and continued expansion and sales growth opportunities.”

How has she kept the Minneapolis-based chain on a growth track?

Smith, 56, looks way down the road. She figures out what the sports-bar company needs to do in order to keep expanding over the next three to five years vs., say, three to six months.

 

Hello Columbus

Buffalo Wild Wings opened 32 years ago in Columbus, Ohio, and has been public for 11 years.

The restaurants are part sports bar, part casual eatery, with TV screens showing sporting events from around the globe.

And it still considers itself a growth play.

“We’re not a dividend payer, we’re not doing stock buybacks right now, but rather, we’re investing in our growth,” Smith said. “When we were smaller, it certainly was a lot easier because it’s a lot easier to double when you have $10 million in sales vs. a billion in sales.”

Amid that challenge, Buffalo Wild Wings is a force in the restaurant industry. After Smith joined in 1994 as chief financial officer, she closed underperforming units, changed the chain’s name from BW3 and updated the logo.

She took over as CEO in 1996. Under her reign, Buffalo Wild Wings has expanded to all 50 states and across both borders, broadened its menu and added technology for ordering and entertainment.

She also brought structure to what had been a rather rudderless company.

“We were so small that it really had no infrastructure. In a way, it was like starting a business,” Smith said. “We didn’t have a marketing department, we didn’t have a talent management department.”

Smith also helped set up an advisory council for franchisees. Her prior experience at Dahlberg, maker and franchiser of Miracle-Ear hearing aids, helped her define what kinds of franchisees Buffalo Wild Wings wanted to attract.

Growing up in Grand Forks, N.D., she didn’t know what career path to take. But she always heard her father, who worked in banking, talking shop at home. So business became quite familiar to her.

In her first job as a 16-year-old, Smith filed checks for a bank and performed bookkeeping duties, rising to become a teller.

She enjoyed economics classes in high school and the University of North Dakota. Seeing her prowess with numbers, a professor suggested a career in accounting.

Smith went for it, joining the accounting-consulting firm KPMG.

That move turned into an 11-year post with Dahlberg, where she served as chief financial officer. After the firm was acquired, she stayed on for a year, then heard from Buffalo Wild Wings, which was still called BW3. She was all in.

It turned out to be the right decision — for Smith and the wings-and-beer chain.

After setting up infrastructure and steering the company onto a growth path, Smith took B-Dubs (a moniker it sports on its website) public in 2003, raising more than $50 million in the initial public offering. As shares continue to advance — up 10% this year — the company has scored compounded annual revenue growth of 27% and net income growth of more than 34% the past decade.

With a 98 Composite Rating, Buffalo Wild Wings is a leader in IBD’s Retail-Restaurants group. Its five-year earnings growth rate and sales growth rate are 23% and 25%, respectively.

 

Cheers

“Her leadership has shaped the brand by remaining true to who they are and where they came from,” Tristano said. “By expanding the menu to be more relevant (burgers), and by keeping pace with technology and entertainment platforms, BW3 has continued to shine in an industry that has been struggling with low growth and weak performance since the recession.”

Aside from her nine-month stint as a waitress 15 years prior to joining the company, Smith didn’t have direct restaurant industry experience. But she has excelled by drawing on her financial background, speaking with other industry executives and studying what has worked for them.

Smith has what she calls a collaborative management style. When she meets with team members, she tells them that there’s enough work for everybody. Teamwork, not territorial behavior, helps advance the company.

“I think the more people that can be exposed to other areas, not just their own, they each would have a much better understanding of what everybody is trying to achieve,” she said. “So I’m big on collaboration and working together to solve a problem, whether it’s in your specific area (or not).”

 

One For All

When Smith goes on the road, she visits restaurants and interacts with management and employees to find out everything from what’s working to details about hiring and distribution to what would make the job easier or more fulfilling.

“I’ve always been a curious person,” she said. “I do a lot of reading, and I have since I was very young. So being able to ask questions helps me learn, and I think sometimes you ask questions to help the other person learn.”

Clearly, exploring fresh possibilities matters to Smith. While advising college students interested in a career at the executive level, Smith encouraged them: “Don’t be afraid to take a lateral move to learn another aspect of the business, or a lateral job. It isn’t all about up, up, up. And don’t be afraid to take a job that’s undefined. Most of mine have been.”

Take her start at Dahlberg. Her position was new, and it was a small company. Then there’s Buffalo Wild Wings, which was a fledgling, local firm when she joined.

On the personal front, Smith dives into newspapers’ business and technology sections, belongs to a book club, bikes, golfs and enjoys cooking with her two kids.

What’s next for Buffalo Wild Wings? Smith still sees big opportunities in America in terms of unit growth and individual restaurant growth. She also sees international expansion, with plans to reach the Middle East and the Philippines.

Technomic’s Tristano would agree. “BWW likely has greater opportunity to expand outside the U.S., in North America and other major international food-service markets across the globe,” he said. “There continues to be strong opportunities for expansion in the U.S. in smaller suburban and rural markets where wings and sports are in high demand.”

Meanwhile, said Smith, “I love going into the restaurants and hearing that someone’s been with us for five years or seven years, or they’ve been on 10 new-store-opening teams, or that they love working at Buffalo Wild Wings.”


Domino’s is Hot; Pizza Hut Needs Reheating

October 22, 2014

By Sarah Halzack

(c) Copyright 2014, The News Journal. All Rights Reserved.

Domino’s Pizza and Pizza Hut are the titans of the $38 billion U.S. pizza market, and at this moment, one chain is piping hot and the other is in need of reheating.

Domino’s dazzled investors this week with third-quarter results that showed sales at stores open at least a year grew 7.7 percent in the United States and profits jumped 8 percent. The chain, which has 5,000 restaurants in the U.S., also said it attracted more customers and saw the average size of their tabs increase.

But things at Pizza Hut are looking decidedly less upbeat. Its parent company, Yum Brands, said last week that Pizza Hut’s same-store U.S. sales fell 2 percent in the most recent quarter and that its operating profit for the full year is likely to fall short of initial forecasts.

So why are these companies in such dramatically different postures?

The delivery food business has always been about convenience, and now the battle for the biggest slice of the pie is increasingly being waged online. So far, Domino’s has outmaneuvered its competitors with a popular app that is helping drive sales.

“I think it has really boiled down to convenience and the ability for Domino’s to really capitalize on the move toward online and mobile,” said Stephen Anderson, a restaurant industry analyst with Miller Tabak.

Domino’s says that 45 percent of its U.S. sales now come from customers ordering online and that they are running up a higher tab than people who call in their orders.

In a conference call with investors Tuesday, chief executive J. Patrick Doyle said that digital ordering capabilities are also leading to a higher volume of orders from repeat customers.

“It’s ultimately about the better retention of customers, better frequency of orders from customers, and as they have a better experience with Domino’s, we get more orders from them,” Doyle said.

Domino’s added a voice-ordering capability to its mobile app in June. Before the company started advertising the feature a few weeks ago, 200,000 orders had already been placed this way.

On social media, some consumers seem befuddled by the feature, wondering how it’s any improvement over ordering a pizza the old-fashioned way – by picking up the phone.

But Mark Kalinowski, lead restaurant analyst for Janney Capital Markets, said the voice app could be valuable to customers because it brings consistency to the process and it eliminates long hold times.

Meanwhile, Pizza Hut says that while its digital business is growing quickly, it has also acknowledged it is lagging its rivals.

“Our goal is to not only catch the competition on the digital front, but to surpass it in 2015,” said Yum chief executive David Novak in a conference call with investers earlier this year.

Yum says it is working hard to turn around the poor performance at Pizza Hut, not only by strengthening its digital offerings but by overhauling its marketing efforts and debuting new menu items that will connect with millennial diners.

The company said it recently “had good success” with the debut of its Hershey cookie dessert offering and its bacon and cheese stuffed crust pizza.

While the shift to digital pizza ordering is putting pressure on the major national brands to innovate, it could be creating problems for mom-and-pop shops and regional chains. These smaller operations likely don’t have the dollars to invest in such technology, meaning they might face fresh challenges in attracting convenience-focused customers.

Domino’s digital strategy has been crucial to its recent success, but analysts say the company has also gotten a boost from an effective marketing strategy that focuses on the improved quality of its ingredients. The company has also introduced a concept called “Pizza Theater” to some of its stores which allows the customer to see their pizza made fresh before their eyes. The hope is that this model can help boost its dine-in business and emphasize freshness.

“They’re really starting to reinvest in their brand by trying to shift the model from quick service to fast-casual,” said Darren Tristano, executive vice president of Technomic, a food and restaurant industry research firm.

Pizza Hut, meanwhile, has been more focused on emphasizing low prices with deals such as a large two-topping pizza for $7.99. Promotion-oriented strategies have been common in the quick-service restaurant industry lately as retailers try to get price-conscious consumers off the sidelines.

Both companies say they expect to remain focused on building their digital platforms to win market share in the future.

“You’re only going to be as good as your next platform or your next innovation,” said Chris Brandon, a Domino’s spokesman. “So we’re already starting to look at what are customers are telling us they want more of.”


Wahoo’s Grows Up

August 26, 2014

Ray-wahoosgrowsup-OCBJ-599x1024Paul Hughes

Orange County Business Journal

© 2014 Orange County Business Journal. Provided by ProQuest Information and Learning. All Rights Reserved.

Chain Gets Past Downturn, Puts Corporate Vet in Kitchen

Wahoo’s Fish Taco wants to keep it casual for customers even as it tightens up the way the 61-restaurant chain goes about its business.

That’s a shift for a company with laid-back Orange County roots-its dining rooms are monuments to surf and skate culture, with stickers for various brands dominating the decor.

It also is a response to some bruises sustained during the recent recession.

“Like everyone else, we’ve had a rough couple years,” said Wing Lam, a cofounder who is the chain’s public face.

The recession left behind a new catch phrase for established restaurant chains, he said: “Flat is the new up.”

It’s been up and down for Wahoo’s, according to Lam, with a dip last year. The Santa Ana-based chain’s 61 restaurants-34 company-owned and 27 run by franchisees-accounted for sales of $52 million, a 4% drop.

The chain is back on a growth track this year, according to Lam.

“We’ve had growth every month through July compared to the last two years,” he said.

Most of the restaurants are seeing revenue growth between 2% to 8%, he said.

The aim now is to establish a new approach that provides more structure to a lot of the processes that go into getting food to customers.

Lam and his brothers Ed Lee and Mingo Lee cofounded Wahoo’s with Steve Karfaridis, the company’s chief operating officer, in 1988. It grew into a small roster of restaurants and began franchising in 1993, often to the founders’ friends.

By 2010, it had 54 locations, including 21 franchises in California, Hawaii, Colorado and Texas, and was aiming for 70 in early 2013.

The push for expansion through franchising led to the 2010 hire of Tom Orbe as a vice president, an early step toward a more formal approach for the chain. Orbe was a franchisee himself and still operates a Wahoo’s in Temecula and another in Huntington Beach.

Trying to grow through the economic downturn produced mixed results.

Wahoo’s didn’t make it to 70 restaurants it has closed three since 2012, including one in New York, its first on the East Coast.

Deals in Arizona and Rhode Island also haven’t panned out.

The chain is adjusting, with plans to open a restaurant in Philadelphia in November. It’s rethinking its bid in New York, where the initial location was in Manhattan. It’s now eyeing suburban Westchester and Long Island for another try.

Wahoo’s added a location in Japan last year, and the chain wants more overseas.

It also has a big project in the works in its backyard: a restaurant at the Honda Center.

“Good Hard Look”

The strong start this year hasn’t deterred Wahoo’s from longer-term strategies.

“We’re taking a good hard look at systems and putting most of our resources there,” said Karfaridis.

He said Wahoo’s will bring point-of-sale, labor management and accounting to cloud based hosting.

Wahoo’s also plans to add ordering to its smartphone app, he said.

Another big effort is focused on supplier relationships, a key to containing costs and saving time.

A roasted salsa, for example, is shipped almost ready to Wahoo’s restaurants by a supplier working from one of the chain’s proprietary recipes.

“They create the base, and we finish it,” Karfaridis said.

Another supplier starts the teriyaki sauce, but each location completes it. A meat vendor pre-slices came asada-something that used to be done by Wahoo’s staff in the restaurants.

“As you grow, you come to a decision point,” Karfaridis said. “How do you preserve the spirit of the food while growing? How do you scale Wahoo’s without compromising quality?”

Balancing Act

It’s a balancing act for a chain that’s facing new levels of competition, said Darren Tristano, executive vice president of Chicagobased restaurant industry researcher Technomic Inc.

“They have to build on the menu and flavors without straying too far from the core tastes,” Tristano said. “The fish taco made them popular, but fish tacos are everywhere now.”

Karfaridis said customers often guided menus at individual restaurants.

“They’d say, T want my Maui bowl in a burrito,’ so we created the Banzai Burrito,” he said.

That produced good relations but inconsistent results across the chain.

Karfaridis said Wahoo’s wants to keep the close-up feel of the chain but streamline the process.

Wahoo’s brought on Raymond Martin in January to work on the menu.

He had stints at Huntington Beach-based BJ’s Restaurants Inc. and Calabasas Hillsbased Cheesecake Factory Inc.

Less Complexity

His mandate is to reduce complexity and costs in food preparation and presentation while maintaining or improving taste and service.

“You don’t want to waste steps or product, and customers are looking for new flavors,” Martin said.

He said he got a better price and more consistent product on tortillas through a new deal with Irving, Texas-based Mission Foods, a major supplier.

He focused on fewer ingredients with strong flavors-ginger, garlic and onions for its teriyaki sauce.

Martin cut the cooking time on came asada to retain more meat and juice. The beef continues to cook as it comes hot off the grill, ensuring its still cooked properly when it reaches the customer.

“You keep more meat, use less sauce and get the same amount of product,” Martin said.

He added a table salsa by tweaking Wahoo’s legendary pico de gallo-which is also still available-and is testing a spicy ketchup, a southwestern ranch sauce, smashed beans and seasoned onion rings.

Don’t expect sweeping changes-Lam said fish is still king.

Nearly half of Wahoo’s customers are going to eat something with fish in it, he said.

“You can get a chicken burrito from anyone,” Lam said. “But there’s only so much fish out there, and we have a great relationship with our suppliers.”

Honda Center

Martin estimated 80% of the menu has been improved in some big or small way.

Tristano said Technomic’s research on Wahoo’s consistently reveals high levels of consumer loyalty.

That meets the benchmark set out by the chain’s owners.

“Nothing will be compromised,” Karfaridis said. “We’re adding scalability and leaving the core qualities intact.”

Back in 2010, when Wahoo’s brought Orbe to boost franchising, he said the chain could grow to 400 or 500 locations but didn’t want to do it in “cookie-cutter” style.

Lam used the same term last year to describe what he intends to guard against in the latest push for growth.

“While Chef Ray is working, I’m out there gallivanting in the Wahoo’s (food) truck testing the theories,” Lam said. “Then he and I compare notes.”

Lam said not all of his ideas translate into good-or cost-effective-products on the wider scale that Martin’s been hired to oversee.

“He’s about process and presentation, and I’m about convenience and flavor, and we meet in the middle,” Lam said.

The results of the collaboration will get a showcase when Wahoo’s opens in the Honda Center this fall.

Success there could lead to another growth push and more hires for Wahoo’s management team, Karfaridis said.

“We can bring in people to do that,” he said. “This has been four guys doing all of it on the run for a long time.”

Wahoo’s Fish Taco wants to keep it casual for customers even as it tightens up the way the 61-restaurant chain goes about its business. A roasted salsa, for example, is shipped almost ready to Wahoo’s restaurants by a supplier working from one of the chain’s proprietary recipes. How do you scale Wahoo’s without compromising quality?” Balancing Act It’s a balancing act for a chain that’s facing new levels of competition, said Darren Tristano, executive vice president of Chicagobased restaurant industry researcher Technomic Inc. “They have to build on the menu and flavors without straying too far from the core tastes,” Tristano said.


Call it What You Like, but Not a Chain

August 13, 2014

By ANDREW ADAM NEWMAN

The New York Times

Copyright 2014 The New York Times Company.

Adco-master675WHITE CASTLE claims with pride that it is the first fast-food hamburger chain, and for good reason. It opened in 1921, just 15 years after Upton Sinclair’s ”The Jungle” exposed horrific conditions in meat-processing plants. With its pure-sounding name, white interiors and fully viewable food preparation areas, White Castle helped restore America’s appetite for beef, promising consistency regardless of which location a customer visited.

But today chain ownership is sometimes viewed as a negative by food aficionados seeking one-of-a-kind food trucks and microbreweries, and locavores celebrating restaurants that use ingredients close to home.

 

Now Legal Sea Foods, which has about 35 locations, most in the Boston area, is railing against the term. Its chief executive, Roger Berkowitz, argues in a series of new commercials that its seafood restaurants should never be called a chain.

 

”While Legal Sea Foods has a number of locations, we’re not a chain,” says Mr. Berkowitz, seated at a restaurant table, in one of the new spots. ”Each of our restaurants is unique, not cookie-cutter, so you can call me stupid, an egomaniac, or even an” — the word is bleeped and his mouth pixelized in a scene. ”Just don’t call me a chain.”

 

In another spot, Mr. Berkowitz is hooked up to a lie detector, and his interrogator asks if he is the owner of Legal Sea Foods, to which he responds ”Yes.” He is asked if it is a chain, to which he responds ”No” as the needles etch straight lines on the scrolling paper. ”Is the person who called Legal Sea Foods a chain a complete moron?” asks the interrogator. Stone-faced, Mr. Berkowitz pauses a moment, then responds ”No,” sending the needles scribbling wildly up and down.

 

The spots close with a new tag line for the campaign, ”Where chain is a four-letter word.” The campaign, which also includes print advertising, is by DeVito/Verdi in New York. The company declined to provide estimated advertising expenditures for the campaign, which will be introduced Friday in the six states, and the District of Columbia, where restaurants are.

 

Mr. Berkowitz, who since 1992 has run the company that his father started — first as a Cambridge fish market in 1950, then a no-frills fish restaurant in 1968 — has long insisted on using the term ”family” or ”group” to refer to his restaurants.

 

”When anyone thinks of a chain, they think of cookie cutter, institutionalized, dummied down, and those aren’t the best adjectives,” Mr. Berkowitz said in an interview.

 

”There’s sort of a built-in prejudice about it that really doesn’t define who we are and what we do.”

 

Unlike many chains, Mr. Berkowitz said, Legal is privately held, and its restaurants are all company-owned rather than franchised. Menus vary among locations, and the company has several iterations, like restaurants called Legal C Bar, which are more bar-focused, Legal Test Kitchen, which are faster and more focused on to-go offerings, and Legal Oysteria, which has a Northern Italian menu.

 

”People never associate chains with the kind of passion or quality that we put into our food,” Mr. Berkowitz said. ”So if we’re referred to in a review or something like that and ‘chain’ is used, whether inadvertent or not, there’s almost just a dismissive aspect to it that I find objectionable.”

 

The term can even give compliments a backhanded flavor, like a New Jersey food blogger who put this headline on a glowing review: ”Legal Sea Foods is a chain, it’s in a mall: and it does not suck.”

 

In the industry, however, others disagree on how to define ”chain.”

 

Technomic, a restaurant consulting and market research firm, considers a company with 10 or more restaurants to be a chain, said Darren Tristano, its executive vice president. He had no recollection of any of the top 500 restaurant brands that Technomic tracks proclaiming in advertising that they were not chains. (Legal, based on estimated revenue of $186.2 million in 2013, is ranked at 167 on that list).

 

Mr. Tristano lauded Legal as ”a brand that’s been around a while and knows its customer.” He added that he could understand why Mr. Berkowitz might feel ”pigeonholed” by some of the negative connotations. But he found something particularly ironic about the mere existence of the new advertising campaign.

 

”The single mom-and-pop type of restaurant does not have an advertising budget,” Mr. Tristano said. ”And it doesn’t have the economies of scale for purchasing that a 30-plus unit chain has,” he continued, ”so if you’re in the industry and you run a restaurant group that’s large, you’re a chain whether you like it or not.”

 

DeVito/Verdi has taken a provocative approach in much of its Legal work over the last seven years. For its first campaign, it promoted freshness in print ads with copy like: ”If our fisherman comes back with fish we don’t like, we throw the fisherman back,” and, ”Fish so fresh one time the main course took a bite out of the appetizer.”

 

In 2013, promoting the notion that omega-3 fatty acids found in fish promote brain function, the brand introduced a series of commercials and print ads that featured people doing stupid things. The ads included a man sawing off a branch as he sat on it, another man stopping a ceiling fan with his head, and a women shutting herself in a Laundromat dryer. The tag line: ”Fish is brain food. We have a fish.”

 

Ellis Verdi, president of DeVito/Verdi, said that the campaign about chains was unlikely to cause a drastic change — for now.

 

”My expectation is not to change the vocabulary necessarily, because that takes a while,” Mr. Verdi said. ”But we want to at least put it in their minds that this isn’t something that we like to be called or it makes sense to call us.”

 

In new commercials, Roger Berkowitz, chief executive of Legal Sea Foods, stresses the singularity of each of its outlets.


Craft Soda Maker Cool Mountain is Hot

August 12, 2014

MONICA GINSBURG

Crain’s Chicago Business

(c) 2014 Crain Communications, Inc.

Untitled-1As a kid in the 1970s, Bill Daker recalls frequent outings to Lasser’s Beverages, a now-defunct soft-drink company on the North Side, where he and his brothers would swig a 32-ounce bottle of black cherry, blue raspberry or cream soda for 50 cents. Today, Mr. Daker is president of Cool Mountain Beverage Inc., a throwback line of neon-colored sodas he launched in 1997 with his brother John.

“The old pop-shop flavors, the glass bottles—it’s all memories of what we had when we were kids,” he says.

The kings of carbonated beverages may be suffering as consumers cut back on everything from Diet Coke and Diet Pepsi to Fanta and Mountain Dew. But for Des Plaines-based Cool Mountain and other little guys such as Jones Soda Co. of Seattle and New York’s Brooklyn Soda Works, these are the good old days.

 

Cool Mountain’s revenue is up 30 percent this year from 2013 and the company booked its first profit last year, though Mr. Daker declines to provide financial figures. Its soft drinks are available in 21 states, including Illinois since Aug. 1, and Canada, Britain and Singapore.

 

“The continuation of the artisan and crafted trend is moving into soda,” says Darren Tristano, executive vice president of Technomic Inc., a Chicago-based research company. “It’s like craft beer, where consumers, especially younger consumers, are willing to pay more for what they perceive as better quality and a bolder taste.”

 

The test, says Mr. Tristano, will be what happens when consumers get a thirst for something else. “Like most trends, there’s a short-term growth phase that gradually declines as consumers shift to something new,” he says. “Fifteen years ago, consumers traded up from Baskin-Robbins ice cream to Cold Stone Creamery, only to shift to frozen yogurt a few years later.”

 

Mr. Daker, 47, has survived one bust already. In 2003, as fuel prices spiked, 10 of Cool Mountain’s distributors went out of business, leaving him holding $150,000 in unpaid receivables. “It was our worst year,” he says. “It almost took me out. But by then I had so much money invested, I had to keep it going.”

 

PREMIUM PRICING

 

Cool Mountain’s sodas come in seven flavors—the top sellers are black cherry and strawberry. Like other craft bottlers, it uses 100 percent cane sugar and no high-fructose corn syrup. A 12-ounce bottle sells for $1.50. By comparison, Walgreens in mid-July was selling a six-pack of 16-ounce bottles of Coca-Cola for $2.50.

 

The brothers cooked up the business in 1995 after Mr. Daker was laid off as an electrician at Chicago-based Montgomery Ward & Co. They spent two years working with three private-label beverage companies to capture the flavors of their youth, financed with $150,000 from personal savings, family loans and credit cards. John, 48, left the business in 1999 and does maintenance work in Arizona. Another brother, Jim, 63, remains a minority owner.

 

In the early days, Mr. Daker admits, he had little knowledge of the beverage business and was blindsided when Jones Soda expanded just as the brothers were rolling out Cool Mountain. “From the start, we were competing for distributors and we were the runner-up to Jones,” he says. “The soda business is about volume, and the ones who have volume win the race.”

 

Better times came in 1999, when Mr. Daker stopped manufacturing Cool Mountain’s sodas with two Chicago co-packers and instead began to license its recipes to other manufacturers, which would either handle distribution or sell to other distributors.

 

Today Cool Mountain works primarily with Dr. Pepper Snapple Bottling Group Inc. in West Jefferson, North Carolina, and Real Soda Ltd. in Gardena, California. Mr. Daker’s largest customer, Ingels Markets Inc., a chain of 200 supermarkets in the Southeast, accounts for 10 to 15 percent of business.

 

That sales are growing at all in 2014 says something about Cool Mountain’s cachet. Total volume of carbonated soft drinks fell 3 percent in 2013, the ninth straight year of decline and the lowest since 1995, according to Beverage Digest LLC, an industry tracker in Bedford Hills, New York.

 

And while Cool Mountain just has begun selling in Illinois—it had been blocked by exclusivity clauses with some distributors—Mr. Daker launched another brand, Chicago Root Beer, here in 2011. It’s made in Chicago and sold in kegs. Chicago Root Beer makes up 20 percent of the company’s revenue, with a quarter-barrel selling for $45. Horseshoe Casino in Hammond, Indiana, is the largest customer.


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.


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