Cage-free eggs could boost Bloomin’ Brands’ bottom line

February 29, 2016

Ashley Gurbal Kritzer
Tampa Bay Business Journal
Feb 23, 2016
http://www.bizjournals.com/tampabay/blog/morning-edition/2016/02/cagefree-eggs-could-boost-bloomin-brands-bottom.html

Don’t count the cage-free eggs before they’re hatched, but Bloomin’ Brands Inc.’s latest supplier decision could boost its bottom line.outback-ft-myers-evening-750xx1800-1013-0-104

Tampa-based Bloomin’ (NASDAQ: BLMN) said Monday that it will transition to 100 percent cage-free eggs in its restaurants by 2025. Bloomin’ is the parent company of Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill and Fleming’s Prime Steakhouse and Wine Bar.

“Our guests expect us to source and purchase wholesome ingredients responsibly,” Juan Guerrero, chief global supply chain officer, said in a statement. “We are working with our suppliers to ensure we meet or exceed this deadline.”

Committing to cage-free eggs is a popular move in the restaurant industry. In September, McDonald’s Corp. (NYSE: MCD) said it would shift to cage-free eggs, as is Dunkin’ Donuts (NASDAQ: DNKN) and Taco Bell, which is owned by Yum! Brands Inc. (NYSE: YUM).

Bloomin’ operates close to 1,500 restaurants throughout 48 states, Puerto Rico, Guam and 22 countries.

The cage-free move, Bloomin’ said, “reaffirms the company’s commitment to the humane treatment and handling of animals” — and that’s important to consumers, according to Technomic Inc., a Chicago-based food industry research and consulting firm.

“Cage-free is particularly important right now,” Darren Tristano, Technomic president, wrote in a Feb. 2 blog post. “Forty seven percent of consumers said they are more likely to order dishes made from cage-free eggs or poultry during breakfast dine-out occasions.”

“The preference ties into health and wellness concerns from consumers,” Tristano said.

“Consumers are increasingly concerned about transparency — what’s in their food and where it came from,” he wrote, “and operators and suppliers are feeling the heat.”


Snacks are having a moment and food makers cashing in

February 26, 2016

Samantha Bomkamp
Chicago Tribune
February 22, 2016
http://www.chicagotribune.com/business/ct-snacking-boom-0223-biz-20160219-story.html

The market for snacks, sold at Walgreens and other retailers, is growing rapidly, analysts say, and manufacturers are working to cash in on the popularity. (E. Jason Wambsgans / Chicago Tribune)

The market for snacks, sold at Walgreens and other retailers, is growing rapidly, analysts say, and manufacturers are working to cash in on the popularity. (E. Jason Wambsgans / Chicago Tribune)

Three squares are so passe. Snacking is having a moment, and — you’re driving it.

You could be a 25-year-old Instagram-loving foodie, who shares daily updates of your homemade mini-meals and trendy restaurant tapas. Or a 33-year-old budding entrepreneur, who opts for smoothies and meal replacement bars because you don’t have time to shop, but have no time for junk food, either. Or a 41-year-old father, who indulges in a daily Starbucks run with co-workers. Or a 65-year-old retiree who isn’t up to preparing dinner anymore and opts for a bowl of popcorn or ice cream instead.

Consumers are driving food industry players — manufacturers and restaurants — to introduce items that satisfy a rapidly growing appetite for smaller meals that can be consumed on the run, even though it may not be the healthiest way to10 eat. Whether the fear of calories posted on restaurant menu boards is causing us to order smaller meals or hectic schedules are driving us to this new kind of eating, major food companies have caught on in a big way.

“The tradition of a piece of fruit or a handful of nuts as a snack — those are still there, but overall the definition of a snack has dramatically changed,” said Technomic President Darren Tristano.

Snacks spell big opportunity for food companies because they tend to be more expensive than traditional meal components. And one look around a grocery store shows that retailers like their potential too, as snacks get more prominent space on shelves, with some healthier fare being stocked in the produce department.

At cereal powerhouse Kellogg, whose brands include Pringles, Cheez-It, Keebler and TownHouse crackers, snacks have gone from 20 percent of its business in 2000 to almost 50 percent today.

This year, the company expects brands that have been struggling, like Kashi and Special K, to lead the growth. Both saw strong sales in the early 2000s, but fell out of favor when consumers steered away from “diet food,” Kellogg CEO John Bryant said on a conference call last week.

The brands have been revamped, and boxes include buzzwords like “nourish” instead of “diet,” and Kellogg is focusing the brands on hand-held forms, instead of just cereal by the bowl. “The expectation of consumers in the snack market has changed,” he said.

But Kellogg also expects brands like Pringles and Cheez-Its will be strong, and it is hurrying to develop more single-serve packages for its snacks so they become a grab-and-go item in a convenience or drug store.

At Hormel, whose meat brands including Jenni-O and Spam, it’s Wholly Guacamole that’s stealing the show, particularly in single-serve containers, according to CEO Jeff Ettinger. Hormel also recently introduced Skippy PB Bites with either a crunchy peanut butter or pretzel core.

Oak Brook-based TreeHouse Foods used to count beverages as its biggest category, but a 2014 acquisition propelled its snacks category to No. 1, and it now says it’s the largest private-label trail mix maker in the U.S.

Even health care companies are entering the snack market.

Abbott Laboratories, maker of Pedialyte, Ensure and Similac formula, earlier this month launched a line of snack bars called Curate aimed at adults seeking healthier alternatives to chips or cookies.

And last month, Chicago-based Hillshire Brands introduced a line of snacks aimed squarely at the young Instagram-addicted foodie, launched at a VIP event in New York with a former “Top Chef” contestant and Bravo’s Andy Cohen. The snacks include chicken bites with sauces like mango habanero and spicy chipotle and “small plates” of salame, cheese and crackers.

“Consumers are shifting away from this traditional snacking definition to include a more expanded variety of options to satisfy a more sophisticated food palate,” said Jeff Caswell, vice president and general manager of Hillshire Snacking. “This evolving definition is being spearheaded by millennials. … They have a passion for food exploration and like to try new flavors and push boundaries.”

He said sales of the new line have exceeded expectations.

Millennials, the largest segment of the U.S. population, are driving the snacking industry to create more fresh, healthy and protein-packed options, but other generations are partaking as well. People tend to snack more as they age, in part because older adults don’t have young families to cook for, said Darren Seifer, an NPD Group food and beverage analyst. The biggest snackers are those 55 to 64, NPD’s research shows.

But more snacking doesn’t always mean hitting the vending machine for a bag of M&Ms. Americans are eating fewer sweet snacks, choosing to save them for an evening indulgence, Seifer said. Their consumption fell about 5 percent in the past decade, compared with savory snacks like chips and beef jerky, which grew by 7 percent in the same period. Meanwhile, so-called “better-for-you” snacks like yogurt and cottage cheese cups have grown 25 percent.

“We start off the day with the best of intentions and then about 8 p.m., after you put the kids to bed, we’re allowing ourselves a bit of indulgence,” he said.

Deerfield-based Oreo maker Mondelez has seen both sides of America’s snacking obsession. Spurred by slowing sales of sweet snacks, it introduced Oreo thins to cater to those who want a healthier version. Mondelez, which also makes Ritz crackers, Cadbury chocolate, Sour Patch Kids and Honey Maid graham crackers, says it’s also focusing on smaller sizes for its brands to cater to snackers.

The company already derives 85 percent of its sales from snacks, up 10 percent from a year ago, and it sees a great deal of growth potential this year.

“Why do we like snacks so much? Quite simply, because of their growth potential. Snacking is a $1.2 trillion market, and it’s growing everywhere around the world,” said Mondelez CEO Irene Rosenfeld at a conference last week.

Smaller, more frequent meals may appeal to many Americans, but they’re not necessarily the healthiest option.

“Snacking or frequent eating tends to be less satisfying to your brain,” said Georgie Fear, a registered dietician and author of “Lean Habits For Lifelong Weight Loss.” “It’s hard to feel like we’ve eaten if we’ve just unwrapped a bar.”

In general, frequent snacks lead to “more dishes, more calories, and they’ve also hampered people’s decision-making abilities” because people can use snacks as an emotional crutch, Fear added.

There is a place for healthy snacking, Fear said, but she recommends sticking to options like whole fruit and yogurt. “Many people have gone out of their way to shift to smaller, more frequent meals. And then they (get more information) and think, ‘I’ve been washing that much Tupperware and it’s working against me?’ “


Is Chipotle really America’s ’emotionally abusive boyfriend?’

February 25, 2016

Grace E. Cutler
FoxNews.com
February 18, 2016
http://www.foxnews.com/leisure/2016/02/18/chipotle-survival-part-joke/

 

Chipotle has been the brunt of jokes and hit by lawsuits, but some experts are predicting positive growth figures as early as the end of the year. (AP)

Chipotle has been the brunt of jokes and hit by lawsuits, but some experts are predicting positive growth figures as early as the end of the year. (AP)

On Sunday, TV host and comedian John Oliver skewered Chipotle over its food safety problems.

The host of HBO’s “Last Week Tonight,” called Chipotle “America’s preferred over-the-counter laxative.”

He ran down a list of Chipotle’s problems over the past months, including E. Coli, salmonella and norovirus outbreaks. He also had a mock promo showing mice scurrying over food and cited a fake report about a live bird living in a Florida Chipotle as recently as January.

About America’s continued love of the chain, Oliver quips:

“They know it’s bad and they want it even more: Chipotle is now officially America’s emotionally abusive boyfriend.”

“That’s harsh,” Darren Tristano, president of Technomic, a Chicago-based food research firm said about Oliver’s comment. “They shouldn’t be left off the hook, but they deserve the chance to really get back on track.”

Over the weeks, Chipotle has been the target of jokes and critics alike –and rightly so.

The Food and Drug Administration reports 55 people were infected with E. Coli alone across the U.S., which resulted in 21 reported hospitalizations. The chain is now the focus of a criminal investigation by the FDA and it has been slapped with a slew of lawsuits. The latest one –this week–is from a shareholder suing Chipotle, alleging the fast food chain made false and misleading statements about its business to investors.

Chipotle isn’t the only food supplier to have a major outbreak of food-poisoning. In the 1993, Jack in the Box had an E.Coli crisis stemming from undercooked beef patties. More recently, Blue Bell ice cream experienced a listeria outbreak, which forced the tubs off of store shelves. Both companies were able to fix their problems and turn their image around.

But Chipotle’s marketing has centered on the idea that it makes a high quality food. These outbreaks, and Chipotle’s problems in tracing the source, puts that question.

As way help its tarnished image, Chipotle earlier this month closed more than 2,000 locations to get employees up to speed on changes to its food safety measures. It also announced a $10 million investment in local farmers that supply ingredients to the food company. To help build some media buzz around these efforts, chains gave away free burritos.

The give-away was “clearly part of a much larger plan to rebuild trust with the customers,” Bruce Hennes, managing partner of Hennes Communications, a crisis communications firm based in Cleveland, told the Cleveland Plain Dealer.

Just how long it will take for the company turn around public opinion is still unclear, but some experts are predicting positive growth figures as early as the end of the year.

Is that’s hard to believe? Tristano says not really, given the “overwhelming” loyalty they have with some customer groups, especially the 18-35 male demographic.

“Our research indicates that American consumers are very forgiving with restaurant brands they are loyal to and have developed both an affinity and frequency with,” said Tristano.

So is Chipotle America’s “emotionally abusive boyfriend?” Sounds like for some, it’s more like a relationship on the mend.


Fazoli’s closes only Las Vegas restaurant

February 24, 2016
Jennifer Robison
Las Vegas Review-Journal
February 17, 2016
http://www.reviewjournal.com/business/fazolis-closes-only-las-vegas-restaurant

1004922526_fazolis_021716_3.jpgThere’ll be no more free breadsticks on North Town Center Drive.

Italian fast-food franchise Fazoli’s has quietly closed its lone Las Vegas eatery. The restaurant, behind the 7-Eleven at Town Center and Covington Cross in Summerlin, shut Feb. 8, 15 years to the day after its 2001 debut.

The closure defies broader market trends, as big, national chains including Chick-fil-A and Cracker Barrel prepare market launches for late 2016 and early 2017.

“Las Vegas is definitely a growth market,” said Darren Tristano, president of Chicago-based restaurant consultant Technomic.

So why did operators shutter Fazoli’s?

Company spokeswoman Janet Ritter deferred to the franchisee, Las Vegas-based Glencoe Management, and Glencoe Management didn’t return phone calls. The company’s website said it owns 21 local Burger Kings, including one at 1280 Town Center Drive, next to the former Fazoli’s.

But Ritter said Fazoli’s, a Kentucky chain with 217 U.S. locations mostly in the Midwest and South, “would like to have a presence in Las Vegas, and we are seeking franchisees to open units in the Las Vegas area.”

The Fazoli’s closure capped a market foray that never really picked up steam.

Ritter said she had no information on number or dates of operation of prior local stores, but at least two other Fazoli’s franchises — one on Ft. Apache Road near Rhodes Ranch and another on Eastern Avenue in Silverado Ranch — opened after 2001 and closed years ago.

The 28-year-old company had as many as 300 U.S. restaurants before it began pruning locations in the recession. Each restaurant typically employs 30 to 40 people, Ritter said.

Competition has hurt Fazoli’s, Tristano said.

The U.S. market is saturated with chains, including Panera Bread and Noodles & Co., that serve pasta and pizza. Plus, Fazoli’s straddles a blurry line between fast food and the more upscale fast-casual segment, which includes operators such as Chipotle and Au Bon Pain.

“That’s not a terrible place to be. The problem is, you’re lumped in to some extent with fast food because of the drive-thru and the price points, but the quality is not at the level of a fast-casual restaurant,” Tristano said. “That’s not to say it’s not good quality, but there are so many concepts with customized, prepared-to-order food.”

It didn’t help that Fazoli’s had just a handful of local stores. A franchise needs 20 to 25 locations in a big market to build loyalty and brand awareness, Tristano said.

Still, Fazoli’s seems to have righted its ship: The company said in December that same-store sales were up in 65 of the prior 68 months, including a 3.1 percent jump year over year in November. It opened 10 new franchises in 2014 and 2015.

And restaurant operators continue to salivate over the Southern Nevada market, Tristano said.

“Las Vegas has the demographics and growth that many chain brands are looking for,” he said. “Not all of the markets in the United States are growing, but you’re seeing housing development and population growth there, and that’s a big deal. Chains tend to be prioritizing growth markets.”


Fast-food chains are gaining muscle again

February 23, 2016
JONATHAN BERR
MONEYWATCH
February 17, 2016
http://www.cbsnews.com/news/fast-food-chains-mcdonalds-burger-king-wendys-gaining-muscle-again/

McDonald’s (MCD), Burger King and Wendy’s (WEN), which have struggled in recent years, are now dishing up some appetizing operating results.

Same-store sales, a key metric of sales at locations open a year or more, have been on an upswing for the big chains recently. For instance, that figure has risen 5.7 percent at McDonald’s over the past 13 months, by 3.9 percent at Burger King over the 2015’s last quarter and by 4.8 percent for Wendy’s in the same period.

According to Darren Tristano, president of restaurant consulting firm Technomic, consumers are spending more at the chains, thanks to lower gas prices and an improving job market. The companies are also selling their food more aggressively to budget-conscious diners, a key demographic for the industry.

“With so much advertising shifted toward value play, $4 for 4, $2 for 2, etc … low prices are driving consumers toward convenience, value and comfort food,” he said, adding that renovations at the chains have also paid off. “Locations are becoming more appealing to consumers, who have viewed these restaurants as old and outdated.”

Burger King parent Restaurant Brands International (QSR) benefited from remodeling the burger restaurants and the expansion of the Tim Horton’s donut shop chain, which it also now owns. During yesterday’s earnings conference call, the company said U.S. franchisee profitability rose by more than 30 percent over last year, which CEO Daniel Schwartz called a “tremendous accomplishment.” Franchisees, who are independent business operators, own many fast-food restaurants.

Restaurant Brands has high hopes for an American classic: Grilled hot dogs, which Burger King is rolling out at more than 7,000 U.S. locations later this month. It may be chain’s largest new product launch since the 1970s.

“I personally visited the test market to confirm that the Grilled Dogs could be an operationally simple but pretty impactful product,” Schwartz said during the conference call. “And we’re all excited about it.”

Restaurant Brands was created in 2014 after the $11 billion acquisition of Tim Horton’s by Burger King Worldwide, which is controlled by Brazil’s 3G Capital. The transaction, called an inversion, lowered the company’s tax bill because it relocated to Canada, and it remains controversial.

Restaurant Brands on Tuesday reported better-than-expected profit, excluding one-time items, of 35 cents per share on revenue of $1.06 billion. Same-store sales rose by 6.3 percent at Tim Horton’s.

Wall Street, though, remains skeptical. Shares of Restaurant Brands have slumped more than 18 percent over the past year, underperforming McDonald’s, which gained more than 23 percent during that same time amid investors’ enthusiasm of a potential turnaround at the Home of the Golden Arches.

Morningstar analyst R.J. Hottovy, however, argued in a recent note that investors were overlooking Restaurant Brands’ potential for growth.

“While McDonald’s turnaround may have generated the most quick-service-restaurant headlines the past several months … Restaurant Brands International continues to fly under the radar with effective menu strategies, new franchise partnerships across the globe and exceptional cost discipline,” he wrote.

Earlier this year, McDonald’s reported its strongest quarterly earnings in nearly four years as consumers responded to the chain’s decision to offer breakfast all day. Wendy’s results beat Wall Street’s analysts’ expectations, and the chain forecast better-than-expected sales at existing locations in 2016.

Other fast food chains are also doing well.

Yum Brands (YUM), the parent of Taco Bell and KFC, recently reported better-than-expected quarterly profit, though revenue growth was hurt by the sluggish performance at Pizza Hut.

Popeyes Louisiana Kitchen (PLKI) announced in January that it expected 2015 per-share earnings to be better than it had previously forecast. It plans to release results on Feb. 23.

If the industry keeps this momentum going, investors may soon start ordering more fast-food shares.


Shrinking sales pushing Bonefish Grill chain to close 14 restaurants, restructure

February 22, 2016
Justine Griffin, Times Staff Writer
Tampa Bay Times
Wednesday, February 17, 2016 11:12am
http://www.tampabay.com/news/business/retail/bonefish-grill-to-close-14-restaurants-and-restructure/2265710

Times files
Bonefish Grille on North Dale Mabry Highway.Bonefish Grill will close 14 restaurants this year as the seafood chain restructures following several quarters of disappointing sales results.

Tampa-based Bloomin’ Brands, the parent company of Bonefish Grill, Outback Steakhouse, Carrabba’s Italian Grill and Fleming’s Prime Steakhouse & Wine Bar, announced Wednesday that it expects the 14 Bonefish Grill locations to close within the year. Bloomin’ took a pre-tax charge of $24.2 million during the fourth quarter of 2015 in connection with the closures. No specific stores were named.

“We needed to strip out the complexity that had impacted the core service at Bonefish and focus on what wasn’t broken,” said Bloomin’ Brands CEO, Liz Smith, during an earnings call Wednesday. “We’ve done that. It’s important to look beyond quarter to quarter. We expect 2016 to be a strengthening and momentum story for Bonefish Grill as we move through the year.”

Sales were down at Bonefish Grill by 5.4 percent for the months of October through December as compared to same period in 2014. Sales for the quarter were down a combined 2.8 percent at all Bloomin’ restaurant brands in the U.S.

Bonefish Grill, which was intended to be the leading brand for new growth in Bloomin’ Brands’ restaurant portfolio last year, saw the steepest declines. This is the third quarter of decline for the chain, which is in a competitive class of “polished casual” chain restaurants, and tends to be more pricey than dining experiences like a TGI Fridays or Olive Garden. The menu quality is similar to restaurants like Seasons 52 or Carmel Cafe.

But Bonefish’s biggest competitors are independent restaurants, said Malcolm Knapp, a restaurant economist in New York City and the founder of Knapp-Track, an industry tool used to track restaurant sales.

“Bonefish is in a good spot where they can appeal to a higher demographic because the food quality is good,” Knapp said. “But independent restaurants are getting bigger and there are a lot of really great chef-driven places out there. With the shrinking size of the middle class, restaurants are seeing less frequency from consumers, who have a lot more choices.”

An “anti-chain” movement from a younger demographic has changed the way consumers are spending their money and hurt chain restaurants like Bonefish. Millennials and generation X-ers are looking for value but often opt to try a locally owned restaurant rather than a chain.

“This is a symptom of a bigger issue,” said Darren Tristano, president of Technomic, a Chicago-based food research firm. “Fast food and fast casual concepts continue to do well but casual dining is staying stagnant. It doesn’t help that Bonefish is a seafood restaurant, which has its ups and downs and isn’t as broadly appealing as steaks or Italian.”

Nevertheless, Knapp believes Bloomin’ is taking the right steps to get Bonefish Grill back on track this year. The company named Gregg Scarlett as Bonefish’s CEO in March 2015. Founding Seasons 52 chef, Clifford Pleau was hired away to Bonefish in Sept. 2014. Since then, the restaurant chain has simplified its menu and instituted an updated look inside newer restaurants.

“They are clearly in the middle of a turnaround,” Knapp said. “Bonefish is not young. The market has moved on from them. But it’s not unusual for large chains to do some pruning like this periodically.”

Bonefish Grill opened two new restaurants in the U.S. from September to December 2015, bringing the total count to 210. The company opened more than a dozen Bonefish locations from 2014 to 2015. However, Smith said in August that development for Bonefish would stall until sales improved.

Carrabba’s Italian Grill also had a shake up in leadership. Bloomin’ Brands announced that Mike Kappitt was named president the day before Bloomin’ released its fourth quarter results. Kappitt will be responsible for leading operations and development of the Carrabba’s brand in the U.S. He most recently served as the senior vice president and chief marketing officer of Bloomin’ Brands. The former president, David Pace, left the company to become CEO at Jamba Juice last month.

Bloomin’ Brands fourth-quarter revenue was $1.04 billion, down 5.3 percent from the fourth quarter of 2014. The company’s net income for the fourth quarter was $17.7 million, down from $22.4 million the year before. Earnings per share were 14 cents for the quarter, down from 17 cents in 2014. Sales were down for the quarter at brands across the U.S. Sales in international markets were up — Outback Steakhouse sales in Brazil saw a 7.3 percent increase. The company operates 75 Outback Steakhouse restaurants in Brazil and 75 in South Korea.

Shares in Bloomin’ Brands fell nearly 11 percent Wednesday to $15.10 despite strong daily gains by all the major U.S. stock markets. The company’s stock price has not been this low since 2012.


Bagger Dave’s slide: After multiple closings, missteps, burger chain goes into holding pattern

February 18, 2016
GARY ANGLEBRANDT
February 13, 2016 8:00 a.m.
Crain’s Detroit Business
http://www.crainsdetroit.com/article/20160213/NEWS/302149989/bagger-daves-aims-to-beef-up-outlook-after-closings-missteps

If the past year is any indication, the future of Bagger Dave’s Burger Tavern is anything but in the bag.

The Southfield-based restaurant chain suffered the indignity of two rounds of restaurant closings in 2015. The first came in August, when parent company Diversified Restaurant Holdings Inc. shuttered three locations, all in Indiana, gnawing $1.8 million in writedowns off the corporate books.

Then in December, eight more locations closed, at a loss of about $10.7 million for writedowns and other costs. One of them was its downtown Detroit location. The others were in Indiana.

The Detroit restaurant had been open for two years. One of the Indiana restaurants didn’t last 10 months; two more barely made it to the one-year mark. The oldest of the Indiana restaurants, the one in Indianapolis, was just 3 years old.

Anyone looking for more upbeat signs than these should avoid cracking open Diversified’s quarterly reports of the past year.

The reports start rosily enough. The first, released in March, predicted between 47 and 51 stores by the end of 2017. (There were 24 at the end of 2014.) These numbers steadily fell in subsequent reports. By the time November’s third-quarter report came around, the company had stopped making any predictions at all.

“We will not commit to any further development of Bagger Dave’s,” the company said in the report, released seven weeks before the December closings.

That doesn’t mean the company had given up on Bagger Dave’s. It opened five last year, including one in Centerville, Ohio, as recently as November, its first in that state. Another is set to open near Cincinnati in late March. But that and the 18 Bagger Dave’s (16 in Michigan, one in Ohio and one in Indiana) that survived the closings — and employ 670 people — will be the last for the foreseeable future.

This is a marked about-face for a company normally hell-bent on growth. It opened six Bagger Dave’s in 2014 and seven in 2013. And that pales to its Buffalo Wild Wings franchise operations, the largest in the country. Last year alone, Diversified added 20 more restaurants, 18 of which came from the $54 million purchase of Buffalo Wild Wings restaurants in the St. Louis area. That brought the number of Buffalo Wild Wings locations under its umbrella to 62.

From the end of 2011 to the end of last year, Diversified increased the total number of its restaurants across the two brands from 28 to 80. This year, though, it plans to add just three — the Bagger Dave’s near Cincinnati and two more Buffalo Wild Wings locations.

Familiar taste

Bagger Dave’s has struggled before. Sales took a hit after Diversified embarked on an aggressive growth plan in 2012, opening or buying 16 stores across its two brands. It listed on Nasdaq the following year.

The pace distracted management from everyday operations, and it was the Bagger Dave’s side of the business that took the hit in sales.

To mend things, Diversified beefed up Bagger Dave’s marketing, launched a corporate training program, brought in an employee-assessment firm and began hiring professionals from national chains such as Red Robin. It brought in consultants from the Disney Institute to go over employee retention and recruitment and rolled out new menus — the first one in early 2014 and another last year. The final rollout wrapped up last September.

It included adding more burgers and removing sandwiches that weren’t selling well, switching from a two-patty burger to an 8-ounce one and adding a grilled chicken breast sandwich. Fries are included in the price of a burger instead of added on. The menu’s marketing pitch changed to tell customers about certain points of company pride, such as how it uses prime rib and sirloin in its burgers and carefully sources its food.

“I’m much, much more connected to Bagger Dave’s now,” CEO Michael Ansley said last April in a Crain’s interview.

Things appeared to pay off. In a conference call for last year’s second-quarter results, Ansley said sales at Bagger Dave’s stores open at least two years had increased 2.5 percent compared with the same quarter a year earlier and 4 percent year to date.

Ansley talked about encouraging positive signs showing in things like Facebook “likes” and “net promoter scores,” which measure customer satisfaction. Investments in technology — tabletop ordering tablets, a mobile app, a gift card program, a “RockBot” jukebox app — promised to further brighten the picture.

Nevertheless, Ansley had to acknowledge struggles. “Despite the positives, we fully appreciate the missteps we have made in the past with respect to the brand,” he said.

One initiative has proved costly. Management was determined to maintain a base staffing level at Bagger Dave’s restaurants, even if sales were low. This policy was done to bolster service and coax repeat visits out of customers.

But this, along with minimum wage increases, pushed up the company’s year-on-year compensation costs by more than 25 percent in the second quarter of last year. This came on the heels of a $2 million spike in compensation costs that brought its tally for 2014 to $9.2 million.

Minimum staffing practices like this are rarely used in the restaurant industry, said Darren Tristano, president of Technomic Inc., a Chicago-based restaurant industry research company.

“There’s nothing financially efficient about it,” he said. “You end up with staff standing around.”

In a conference call on Nov. 5, Ansley and CFO David Burke expressed frustration with the slow pace of results. Burke described Bagger Dave’s as a “Dr. Jekyll/Mr. Hyde concept” because of the changes it had undergone.

There were signs of improvement coming out of investments in the menu and training, but “you don’t see an immediate impact in sales from that,” he said.

The financial picture

Diversified’s breakneck growth comes with a heavy capital burden.

Estimated capital expenditures last year were about $30 million. It spent $36 million the year before.

The buildout of a Bagger Dave’s costs $1.1 million to $1.4 million, according to company financial statements. A new Buffalo Wild Wings costs $1.7 million to $2.1 million. Updates to older restaurants cost between $50,000 and $1.3 million.

A listing on Nasdaq in 2013 raised $31.9 million. But much of the company’s expansion has been financed by debt. Total debt rose from $61.8 million at the close of 2014 to $123.9 million at the end of September, pushed up because of the acquisition of the St. Louis stores.

The company’s share price opened at $2.57 the day the closure of the eight stores was announced. The stock was trading just above $1.50 last week.

A pair of lawsuits last year further strained finances. The two cases, brought by the same attorney, alleged employees who work for tips were made to do the work of non-tipped employees who earn a higher hourly rate. The settlement and related expenses cost the company $1.9 million.

For the first three quarters of last year, Diversified booked a net loss of $6.6 million, compared with an $85,000 profit for the same period in 2014. The company lost $1.3 million overall in 2014. The company does not believe it made a full-year profit in 2015. (Annual results are expected to be released in March.)

Preliminary financial estimates for 2015 show revenue growing 34 percent to $172.5 million from $128.4 million in 2014, in line with the company’s guidance.

Same-store sales increased 2.8 percent at Buffalo Wild Wings and 1.3 percent at Bagger Dave’s from 2014 to 2015, but they decreased 7.8 percent year-over-year in the fourth quarter at Bagger Dave’s and increased just 0.8 percent at Buffalo Wild Wings.

The Buffalo squeeze

Bagger Dave’s menu refresh included adding more burgers and removing sandwiches that weren’t selling well.

The 18 Bagger Dave’s stores that remain don’t appear to be on much better ground.

The eight stores shuttered in December generated $5.5 million in revenue, or $687,500 per restaurant, through the first three quarters of last year and had a pre-tax (EBITDA) loss of $600,000. But the other 18 locations brought in $14.1 million, or $783,333 per restaurant, and had a pretax profit of $700,000. That comes to less than $52,000 per restaurant on an annualized basis, a growth rate of 5 percent.

The revenue per restaurant on an annualized basis comes to $1 million, well below the target revenue per store of $1.7 million, the goal stated in a presentation to investors in January.

A profit margin of 5 percent is low, especially for company-owned stores, Tristano said. Franchisee-owned stores typically hit at least 10 percent because of the fees to the franchisor they must pay.

“They’ve got to be doing better than 5 percent to pay down their debt,” Tristano said.

The obvious question that arises is, were the closures enough?

All Bagger Dave’s restaurants are company-owned. (Plans to franchise the brand several years ago were scrapped.) With a massive Buffalo Wild Wings operation cranking away, the Bagger Dave’s “baby brand,” as Ansley has called it, has had a hard time getting the attention it needs.

Diversified has a contractual obligation with Buffalo Wild Wings Inc. to open 42 restaurants by 2021 and has 15 more to go. The company says it’s ahead of schedule.

Ansley also points out that failing to make that obligation bears only a weak cost: Diversified only has to pay Buffalo Wild Wings $50,000 for each store it does not open — far less than the millions it costs to open one. “With our relationship with Buffalo Wild Wings, I doubt they’d charge us the $50,000,” Ansley said.

In any case, the moves Bagger Dave’s has made demonstrate the pressure on Diversified to stay focused on the much stronger Buffalo Wild Wings side of the business.

“In the year ahead, we plan to focus our resources primarily on growing our BWW portfolio, which represents the overwhelming majority of both our revenue and adjusted EBITDA,” the company said in its third-quarter report.

The move toward Buffalo Wild Wings is smart because it’s a more proven brand than Bagger Dave’s, which is “a good brand but not that broadly differentiated,” Tristano said.

“The reality in our industry is that there’s no shortage of optimism. We hear about these ambitious goals, but very rarely do we see brands meet those goals.”

The response

Last year’s closings, which included one Buffalo Wild Wings restaurant in Florida besides the Bagger Dave’s spots, were the first for the company. But they were a long time coming.

“Bagger Dave’s has given us some fits,” Ansley said in an interview. “We knew we had issues with it two years ago. We made a lot of changes — I can’t even count the changes.”

These changes came too quickly and were confusing for guests and employees. “We were too aggressive. That was the problem, and we learned it the hard way,” Ansley said.

Casual dining chains face intense competition throughout the country, not just from each other but also from fast-casual restaurants like Chipotle Mexican Grill and Five Guys Burgers and Fries. The parent of the Max & Erma’s chain closed eight metro Detroit locations in January.

To counter this trend, Diversified needs to do a better job of marketing Bagger Dave’s by doing things such as telling people of premium ingredients that are mostly sourced in Michigan, Ansley said.

He also is heartened to see interest in properties of the shuttered locations. This includes the one in downtown Detroit, which has garnered “a lot of offers,” he said.

The company is holding the line on the minimum staffing levels that have driven up compensation costs. “There will be a little deleveraging from” the minimum staffing levels that drove up compensation costs but “nothing substantial,” Ansley said.

No more Bagger Dave’s locations will be closed, Ansley said. If the prototype stores do well for the rest of the year, “then we will start expanding again,” he said.

The 18 remaining Bagger Dave’s restaurants are profitable, said Ansley, who is especially encouraged by the performance of “prototype” stores. These stores have the new menus and have been redesigned to be smaller and “hipper.” They are in Grand Blanc, Birch Run, Grand Rapids, Chesterfield Township and Centerville, Ohio.

The three analysts who cover Diversified’s stock are encouraged. They express concern at the company’s debt but agree that the Bagger Dave’s changes are on the right track.

“We think much of the ‘noise’ of the past few quarters is behind the company and management can focus on restaurant operations,” wrote Mark Smith, analyst at Minneapolis-based Felt & Co.