Darren Tristano, Executive Vice president at Technomic, Inc., weighs in on balancing McDonald’s expansive menu with consumer demand.
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Umami Burger started small. Its first restaurant was a cramped joint that didn’t have enough tables, enough parking or even a license to serve beer.
But now the chain wants to go big. It’s closed that first shop, a hole-in-the-wall location on La Brea Avenue south of Wilshire Boulevard, and just got a big chunk of money to continue its expansion, eventually going international.
Adam Fleischman, founder and chief executive of Umami Restaurant Group, told the Business Journal last week that his company accepted $20 million from Fortress Investment Group in exchange for a minority share of the business.
Saul Cooperstein, chief strategy officer for Umami, said the money will be used to fund nationwide expansion for the chain in major urban markets such as Las Vegas; New York; Washington, D.C.; Chicago; and Philadelphia.
“The Fortress investment will really allow us to focus on expansion operations instead of capital for the next few years,” he said. “We look at being able to build consistently at least 10 to 15 restaurants a year, each year, into the future.”
The 13-unit burger chain expects to almost double its footprint in 2013, starting with six restaurants currently in development in Burbank, Irvine, Oakland, Palo Alto, Miami and New York. Los Angeles International Airport will open a seventh restaurant for the chain this year at its upgraded Tom Bradley terminal. The company will also expand its fast-casual concept, U-Mini, which debuted in Westwood last fall.
Earlier this month, Umami closed its original location on La Brea when its four-year lease expired, sacrificing any sense of nostalgia for its origins in favor of opening restaurants in larger, more prominent locations.
Fleischman said the 985-square-foot restaurant, which had space to seat only 60 people and lacked a liquor license, no longer fit the company’s vision for its restaurants. He hopes diners who used to eat at the original location will go to the chain’s flagship that opened at the Grove in the Fairfax district late last summer and can seat 185.
“I’m not really tied to any particular location,” he said. “The potential is so much more exciting, the fact that maybe one day we can open in Japan and in Paris and in London.”
The Fortress investment was the second for Umami since it was founded in 2009. In 2011, L.A. hospitality group SBE Entertainment Group LLC and investment firm Nimes Capital together invested eight figures in the restaurant group. The money, which came from companies headed by brothers Sam and David Nazarian, paid for the chain’s California expansion.
Cooperstein, who worked for eight years managing business development, strategy and acquisitions for SBE before joining Umami in late 2012, initiated the deal with Fortress last fall. He had worked with Fortress on the company’s past investments in SBE.
“Fortress is one of the relationships I built while I was at SBE,” he said. “They’re truly opportunistic lenders and they have a lot of expertise in the restaurant industry.”
Fortress, which is based in New York but has an office in Century City, employs 979 people and manages assets worth more than $50 billion, mostly in real estate holdings. The investment company helped SBE finance the acquisition of West Hollywood’s Abbey Food & Bar in 2006.
Fleischman said Fortress’ investment in Umami came just as the restaurant company was getting low on expansion funds.
“During the fourth quarter last year we saw that we were using our money quicker and that we were going to run out of money at some point around the first of the year,” he said.
Umami executives declined to disclose the percentage of the company Fortress acquired. Fleischman remains majority shareholder.
The company also declined to disclose revenue, but Fleischman said the chain’s top performing restaurant sees annual sales of about $4 million.
The restaurant company employs 635 people but expects to hire about 400 more as restaurants open before the end of the year. An executive team of 35 works out of the company’s 6,000-square-foot headquarters in the Fairfax district alongside SBE.
Cooperstein said that the way the deal was inked, Fortress won’t have a say in the details of Umami’s expansion plans.
“They have confidence in management to execute on the business plan,” he said.
Under the most ambitious scenario, Fleischman said the company could open 100 to 150 restaurants across the country in the next five years. Then, once the chain has established itself on the East Coast, it would look to expand internationally.
But while Umami’s growth plans are expansive, they’re not as aggressive as other chains that compete in the “better burger” restaurant category. Denver chain Smashburger, which was founded in 2007 and sells burgers for between $4 and $7, has more than 100 restaurants open in the United States, including one that opened last fall in Culver City. Similarly priced burger chain Five Guys in Lorton, Va., has opened more than 1,000 restaurants since 2006. Umami, known for its malt liquor tempura onion rings and signature burgers made from meats ground on site, charges between $10 and $14 for its burgers. Its Ahi burger is $15.
Darren Tristano, executive vice president at Chicago market research firm Technomic Inc., said it’s not likely Umami will ever grow as fast as its lower-price competitors.
“Umami has a unique flavor profile and they have put a lot of culinary innovation behind the branding,” he said. “But because of their narrow focus – toward affluent, upper-income consumers who consider themselves foodies–you’re not going to see them expand like a Five Guys. Umami will have fewer broad opportunities to grow within each market.”
Jerry Prendergast, a restaurant consultant in Culver City, said the chain will need the Fortress investment to grow as quickly as it plans to do without franchising, especially when it comes to landing prime real estate.
“Truthfully, it’s tough to find good locations, even in this market,” he said. “Umami doesn’t go into second-rate locations, but they’re well-funded so they can take the time to do it right.”
The partnership with SBE goes a long way to help the chain get the locations it wants, he added.
“SBE already had the machine set up,” he said. “There was already a well-established, well-funded, experienced team of people to help with development who had their tentacles in with real estate brokers all over the country.”
The company will focus its expansion efforts in New York and Miami this year and expand into other urban markets in 2014.
Fleischman said his hometown, Washington, is high on the list.
“D.C. is still prospective, so we don’t know exactly where we want to be, but I’m pretty familiar with the areas there that would work for us,” he said. “I think it’s a great city for restaurants.”
More Franchisees Take Aim at the Denver-Based Sandwich Chain, Claiming Corporate Greed is Shortchanging – and Closing – Stores
Quiznos’ long-standing friction with disgruntled franchisees has surfaced again in a new round of lawsuits.*Since December, 10 suits have been filed in Denver District Court, alleging that the Denver- based sandwich chain has treated its restaurant owners unfairly.*The claims are similar to those in a long history of related legal actions — that the company has taken actions to increase corporate profits at the expense of franchisees who are struggling to break even.*Analysts say the new legal disputes signify more problems for a chain already beset by declining sales, store closures and stiff competition in the sub-sandwich sector.*The latest lawsuits come three years after Quiznos agreed to a $95 million settlement with 6,900 class-action franchisees who said the company overcharged them for supplies and failed to provide adequate marketing support.
In the new round of lawsuits, store owners claim Quiznos continues to overcharge by forcing them to buy food at marked-up prices from a Quiznos-affiliated supplier.
“The hidden mark-ups, which are the keystone of Quiznos’ scheme, have generated massive profits for Quiznos while simultaneously driving its franchisees to financial ruin,” one of the lawsuits says. Most of the suits contain similar or identical language.
The lawsuits allege that Quiznos management increased the use of coupons for free and discounted food — costs that are absorbed by restaurant owners — in order to make the franchisees buy more food at marked-up prices from Quiznos’ supply affiliate.
Denver attorney Jeffrey Cohen, representing the franchisees, said he would offer no additional comment.
Quiznos issued a brief statement and said it would not comment further.
The statement reads: “We believe that these lawsuits are completely without merit. Quiznos management team will not allow these lawsuits to distract us from our mission. We remain committed to delivering a premium product and experience to our guests, and helping our franchise owners grow their sales and profits.”
Named as defendants in the suits are a number of Quiznos corporate entities, including its franchising arm; the supply affiliate; the company’s majority owner, investment fund Avenue Capital Group; and former owners Richard E. and Richard F. Schaden.
Franchisee John Portrera of Petoskey, Mich., a longtime critic of Quiznos’ management, said he shut down his restaurant Dec. 31 after 4 1/2 years because of mounting losses and resulting personal turmoil, including a divorce.
“What they’re doing is criminal,” he said. “I lost my savings. I lost my wife. I cashed in my life insurance policy. I lost everything, but now I’m so happy just to be out of it.”
Portrera said that even though his restaurant was rated highly by Quiznos in categories such as customer satisfaction and cleanliness, he lost about $400,000, including his initial investment and operating losses.
Disputes between franchise companies and their franchisees are relatively common, but few have the persistence and animosity as Quiznos’.
For example, Burger King restaurant owners sued the parent company in 2009, arguing that they were losing money by being forced to sell some menu items for $1. The suit was settled 17 months later, with both sides saying they would collaborate on future pricing decisions.
Analysts say Quiznos’ friction with franchisees has created a debilitating spiral of store closures and declining revenue.
“The sales decline and the heavy couponing have really made it tough for franchisees to make a profit,” said Jonathan Maze, an analyst and writer for Franchise Times magazine. “Quiznos charges a lot of money (to franchisees) for its food.”
University of Denver finance professor Mac Clouse said some restaurant chains with franchise supply agreements use their buying power to acquire food at low prices, and then pass the savings on to franchisees.
Yet the lawsuits claim that Quiznos has taken the opposite approach — using economies of scale to negotiate low prices for bulk-food purchases, then reselling the food at higher prices to restaurant owners.
Quiznos is privately owned and is not required to report financial results to the Securities and Exchange Commission. However, some of its performance metrics can be found in franchise disclosure documents that the company is required to file in some states.
The documents show that Quiznos collected much more money from selling food and supplies to franchisees than it took in from royalties based on sandwich sales.
The supply company, American Food Distributors LLC, which Quiznos describes as an “affiliate,” had 2011 revenue of $225.3 million. Quiznos’ franchise operation, QFA Royalties, collected 2011 royalties and fees of $73 million from franchisees.
The disclosure documents show that the chain’s number of stores fell from 4,381 in 2009 to 2,834 in 2011, a decline of 35 percent over two years. At the peak in 2006, there were more than 5,000 outlets.
Total revenue for QFA Royalties has plunged 41 percent in two years, from $123 million in 2009 to $73 million in 2011. Net income declined by a similar margin in that period, from $47.7 million to $28.4 million.
“Quiznos has struggled, primarily because they’re in an intensely competitive market,” said Darren Tristano, executive vice president of food-service analysis firm Technomic.
“It’s always been a difficult relationship between the parent company and the franchisees,” he said. “It seemed as though they had gotten past that (with past settlements), but now they’re battling again.”
What Chipotle did for the burrito, Flying Pan hopes to do for crepes.
Part of Australia-based BFC Retail Group, the Flying Pan is opening its first U.S. location Monday in the former Bin 27 site at 2702 W. Kennedy Blvd. in Tampa, offering an upscale version of a casual gourmet restaurant, with crepes for breakfast, lunch and dinner.
Crepe options include: the apple pie, with caramelized apples, butter and whipped cream, for $8.45; the Aussie Sunrise, with egg, bacon and Monterey Jack cheese, for $7.95; and the Islander, with salmon, baby spinach and red onions, for $9.25.
Though diners in Europe and the Middle East long have adored crepes as a near-universal wrapper and meal, whether Americans will opt for one over a burger is an open question, said Darren Tristano, a restaurant consultant for the Chicago-based market research firm Technomic.
“The good news is there are not a lot of crepe players here,” Tristano said. “So there’s a big opportunity to franchise in urban and affluent areas, offering people an escape to France. The question is, is this a place to go to two to three times a week like people do at McDonald’s?”
Owner Laurent Corgnet said the company faced that same question when it started in Australia.
“So we gave breakfast crepes with egg, bacon and cheese to construction workers,” he said. “They came back in droves.”
The site in Tampa also has a wide variety of local sodas, such as Ale 8, Earp’s Sarsaparilla and MacFuddy Pepper Elixir.
“We’re making this a cafe in the best sense,” Corgnet said. “A place where you can come any time of day and have a snack or lounge and work with Wi-Fi. Have everything from a crepe with duck, brie and red apples, or a sweet crepe with Nutella, which is good with everything.”
It started off nearly three years ago as a small experiment at a Clayton cafe to test whether people would be willing to pay full price — or more — when there are no set prices so those in need can pay less or nothing at all.
After following it up with four more nonprofit cafes across the nation, Panera is now taking this concept to the next level.
Starting today, patrons will be able to walk into any of the company’s 48 bakery-cafes in the St. Louis region (where it operates as St. Louis Bread Co.) and pay what they want for a new menu item: turkey chili.
If it proves sustainable, the “meal of shared of responsibility” — as Panera calls it — could be expanded to other regions.
“But we never want to put the cart before the horse,” said Ron Shaich, the company’s co-chief executive and the driving force behind the concept. “So we want to see how this does, how it works, and how people respond.”
Shaich said he wanted to find a way to bring the pay-what-you-want concept into more communities.
“We have five stores now,” said Shaich, who often refers to the Panera Cares cafes as a test of humanity. “That’s big by some standards, and it’s still small. So how do we help more broadly?”
The shareholders of the publicly traded company would not be pleased if all 1,650 cafes nationwide were converted to this nonprofit model, he added.
So instead, the Sunset Hills-based company came up with a single menu item.
The meal, which comes in a sourdough bread bowl, will be offered at the suggested price of $5.89 with tax. The item was developed to be rich in nutrients, protein and fiber, to nourish those who are not sure where they might get their next meal.
Even shareholders may have reasons to like this concept.
While the company says it will not directly profit from this new program, experts note that the company as a whole will likely benefit as a brand in terms of the positive feelings and emotions it will create in the minds of customers.
“Consumers are increasingly — particularly young people — looking for socially conscious values in the things they purchase,” said Ken Harrington, director of Washington University’s Skandalaris Center for Entrepreneurial Studies. “They are looking for corporations who are doing what Panera is doing.”
Such a charitable consideration can tip the balance when people choose which businesses to patronize. In fact, he said studies have shown that consumers are willing to spend 10 to 15 percent more on items to support values or causes they share.
The idea isn’t lost on Panera, whose recently launched marketing campaign encourages customers to “Live Consciously — Eat Deliciously.”
The pay-what-you-want chili, Shaich added, is also meant to help elevate the discussion of food insecurity at a time when the unemployment rate continues to be fairly high. According to the U.S. Department of Agriculture, about 15 percent of American households in 2011 were unsure whether they would have enough food to meet the needs of family members.
“We want to challenge the people in St. Louis to understand this issue and vote with us in helping to pay it forward,” Shaich said. “Our commitment is we don’t make anything on this.”
If patrons pay full price for the chili, they will be helping to subsidize the cost for those who don’t pay, because the company will use the 10 percent profit margin on that item to fund the program. But customers can donate to the “meal of shared responsibility” regardless of what they order from the menu.
Any net proceeds after the cost of the program is covered will be channeled to hunger relief efforts, Shaich said.
To be sure, most companies have some sort of charitable contribution built into them as a way to build trust and goodwill with consumers, said Darren Tristano, with food industry research firm Technomic. Just think of the Ronald McDonald House, which helps cover the cost for families to stay close by to hospitalized children.
Panera also donates tens of millions of dollars in leftover products and has recently partnered with Feeding America to channel donations collected in its stores to providing its black bean soup to food banks.
In the case of Panera’s pay-what-you-want model, Tristano said Panera may be better positioned than others to take on the risk of such a program because it is such a profitable company. Panera made $174 million in profit last year, a 28 percent increase from the year before.
And he noted that other companies take on some risk when they offer reduced prices or buy-one-get-one-free deals on new menu items — something that Panera doesn’t usually do.
“Panera is not a discounting kind of brand,” Tristano said. “So they can afford to take these risks. If nothing else, it becomes a trial for this item.”
For his part, Shaich doesn’t see this “meal of shared responsibility” as being a big gamble for Panera. If it doesn’t work, they will just end it.
He said the general competitive landscape in which Panera jockeys against other restaurants is more likely to keep him up at night rather than this pay-what-you-want model.
“Do I wake up in the middle of the night about the ‘meal of shared responsibility’?” he asked. “No, not anymore than I wake up in the middle of the night and worry that somebody is taking advantage of our bathrooms — or our free Wi-Fi.”
In recent months leading up to today’s roll out, Panera has quietly tested the “meal of shared responsibility” at one cafe in St. Louis and at about nine locations in Dallas.
As Panera tests out the pay-what-you-want turkey chili, it remains to be seen whether it will open more nonprofit cafes. For now, Shaich said the company has not announced any plans for more such locations.
“This is not one versus the other,” he said. “It’s kind of a multipronged approach.”
Since opening the first nonprofit cafe in Clayton, the company has opened other Panera Cares cafes in Detroit, Portland, Chicago, and most recently, Boston. Panera spent $1 million to build the Boston cafe, which it then gifted to the foundation and opened in January.
These cafes have ups and downs, but they have mostly stabilized and bring in about 70 to 75 percent of the retail prices of menu items, Shaich said. That’s roughly enough to sustain the cafes. Panera’s foundation kicks in support to fill in any gaps.
Of course, one of the challenges with this model is that it requires a leap of faith on the part of donors that those who are not paying the full price actually need the help and are not gaming the system.
To that end, there are some checks in place. As with the nonprofit cafes, Panera discourages take-out orders and asks that people limit themselves to one free or reduced-price meal per person per day.
For Shaich, the human behavior element has been one of the most fascinating aspects of this experiment. While there have definitely been people who have tried to abuse the system, overall, he says, the results so far show that most people have been responsible.
He said it’s not unlike the question of whether or not you should leave a tip for the housekeeper who cleans your hotel room.
“What do you do?” he said. “Nobody is watching. This is the same kind of thing. It’s meant to create opportunities for people to do the right thing.”
UCLA Extension’s 17th Annual Restaurant Industry Conference is scheduled for April 3 on the UCLA Campus at Covel Commons in Los Angeles. The event will explore emerging concepts, culinary trends and other topics affecting the restaurant industry such as Obamacare.
“It was at prior (UCLA Extension) conferences that the size and scope of the farm-to-fork and food truck phenomena were first explored, as well as the importance of internal marketing and leadership from multiple dimensions. We expect more substantive trends to be unveiled this year,” said Anna Graves, conference chair and co-leader of the restaurant, food and beverage industry group for Pillsbury Winthrop Shaw Pittman LLP.
This year’s conference includes keynote speeches from Greg Creed, CEO, Taco Bell Corp., and Walter Robb, co-CEO of Whole Foods Markets.
Adam Fleischman, founder and CEO of the Umami Restaurant Group, (which also launched its 800 Degrees pizza chain) will join an “emerging concepts” panel that includes Alan Jackson, founder, and Ian Olsen, COO, of the Lemonade Restaurant Group, as well as Tony Shure, co-founder of the Chop’t Creative Salad Company and Burton Heiss, senior vice president of Nando’s Restaurant Group Inc.
Examining menu evolution will be Amy Alarcon, vice president of Culinary Innovation, Popeyes Louisiana Kitchen; Alex Benes, partner at Wood Ranch BBQ & Grill; Randy Kies, senior vice president for growth and development, Lark Creek Restaurant Group; and Donald Moore, chief culinary officer and SVP of kitchen operations, The Cheesecake Factory, Inc. Moderating this panel will be Steven Goldstein, partner, The Culinary Edge.
Which restaurants are winning over customers the best – and maintaining their loyalty – will be part of a market research discussion by Ron Paul, president and CEO, and Darren Tristano, executive vice president of Technomic Inc. Unveiled during this session will be the top 500 chain restaurant performance index compiled by Technomic.
Also, an expert panel will offer attendees the latest advice and insights into the Affordable Care Act. Panelists include Behzad Cohan, president, CG Investments Inc.; Scott Morsch, area senior vice president, Gallagher Hospitality & Restaurant Group; Michelle Neblett, director of labor and workforce policy, National Restaurant Association; Scott Nicholson, vice president of operations, Veggie Grill; and Paul Potvin, CFO, Elephant Bar Restaurants.
The conference also features a panel discussing crisis communication and brand protection.
UCLA economist Dr. Edward E. Leamer will offer the latest figures on whether the U.S. will recover more jobs lost during the recession and how employment rates will likely impact restaurants.
Finally, the presentation of the 2013 Innovation Award will go to Dr. Tim Ryan, president, The Culinary Institute of America. Presenting the award to Dr. Ryan will be last year’s winner, Jerry Deitchle, chairman of BJ’s Restaurants.