Why Chipotle’s Southeast Asian chain couldn’t make it work

March 16, 2017

imrs

By Becky Krystal
https://www.washingtonpost.com/news/going-out-guide/wp/2017/03/11/why-chipotles-southeast-asian-chain-couldnt-make-it-work/?utm_term=.7c03019833f5

All 15 locations of ShopHouse, the Southeast Asian fast-casual restaurant owned by Chipotle, will close on March 17. The closings, first reported by Nation’s Restaurant News on Thursday, left fans distraught.

But it was easy to see the move coming after Chipotle announced in October that it was halting investments in the brand. Instead, the burrito giant’s spinoff aspirations will focus on two other endeavors: Pizzeria Locale and Tasty Made, a pizza joint and a burger place, respectively. “We just didn’t believe that ShopHouse warranted continued investment,” Chris Arnold, a spokesperson for Chipotle, said in an email.

ShopHouse, which opened its first location in 2011 in Dupont Circle, offered customizable rice, noodle and salad bowls inspired by the cuisines of Thailand, Vietnam, Malaysia and Singapore. It represented a glimmer of hope for diners interested in something different and at least marginally more nutritious than what was served at most fast-casual chains.

But selling Southeast Asian cuisine proved to be a losing gamble in an industry dominated by burgers and sandwiches. The top 10 quick-service and fast-casual brands, as ranked by U.S. sales in 2016’s QSR 50, an annual list published by industry publication QSR magazine, don’t include any restaurants serving Asian cuisine. The list is topped by the likes of McDonald’s, Starbucks, Subway, Burger King and Taco Bell.

Even when QSR broke out supposed “ethnic” brands — the label is a bit of a stretch — the results aren’t that impressive. Taco Bell was ranked at No. 5; further down the list are Chipotle (12), Panda Express (22), Qdoba (34), Del Taco (37) and Moe’s Southwest Grill (43). Only one Asian concept made the top 50: Panda Express, a chain perhaps best known for its fried, sticky orange chicken, which is a far cry from ShopHouse’s grilled steak seasoned with fish sauce, or its sweet and sour tamarind vinaigrette.

Those Southeast Asian flavors were unfamiliar to many Americans. Darren Tristano, president of market research firm Technomic, said that when the brand launched, he believed the biggest challenge would be getting consumers to see that Southeast Asian cuisine wasn’t outside the norm. “When your core focus is on that, it just makes it very, very difficult,” he said. He points to Mexican, Italian and Chinese as the big three when it comes to popular international flavors, while Japanese and Greek make the cut to a lesser extent.

In an interview last year with The Post, ShopHouse brand director and co-founder Tim Wildin said he wanted to work with traditional Asian ingredients, noting that Thai flavors in particular had a universal appeal. He acknowledged there was a bit of a learning curve when customers complained the food was too spicy. But there wasn’t necessarily a need to “Americanize” the food, he said, just a need to communicate better.

ShopHouse probably could have improved its communication in at least one other way, said Sam Oches, editorial director of Food News Media, which produces QSR magazine. He said the brand didn’t do enough to promote itself as innovative and unique, which is ironic given the way Chipotle was able to establish a reputation as a trailblazer in the industry.

ShopHouse was “pretty ahead of the curve,” Oches said, adding that Asian fast-casual restaurants are now increasingly popular with millennials.

In the last five years, several have opened in Washington, including Buredo, SeoulSpice, Maki Shop and Four Sisters Grill. Had ShopHouse debuted now, or even just a few years later than it did, it would have entered a market still lacking immediate competitors but perhaps one more receptive to its food. Oches expects that 10 or 15 years from now, the top 10 quick-service brands may not look too different from today, but the rest of the list will likely include more concepts serving Asian cuisine, which are just now scaling up to compete.

ShopHouse may also have partially been a victim of Chipotle’s greater struggles. Following outbreaks of food-borne illness at its restaurants, the company has seen a sharp decline in sales. From 2015 to 2016, revenue dropped more than 13 percent, to $3.9 billion, according to the company’s most recent earnings report, released last month. The decrease in net income was staggering, from about $476 million in 2015 to around $23 million in 2016. “It’s startling how far their fall from grace has been,” Oches said of the brand he described as once being the most bankable restaurant company in America.

[A year after food safety scares, Chipotle has a new set of problems]

Jettisoning ShopHouse may be at least one way the burrito chain is attempting to trim the fat and refocus on its core business, especially considering that, at the time the company announced it was pulling back on ShopHouse, Chipotle chairman and chief executive Steve Ells said that the concept “was not able to attract sufficient customer loyalty and visit frequency to make it a viable growth strategy.”

While ShopHouse only launched a small family of locations, the expansion might have actually made success more difficult to achieve, Technomic’s Tristano said. ShopHouse may have worked best as a single location or limited regional chain, he said, especially as the fast-casual market matures, with possibly not enough customers to go around.

Instead, the brand was diluted between two coasts, with eight locations in the Washington area, five locations in California and another two around Chicago. Had it been able to establish itself as a major player with good recognition in one region, it could have performed better, Tristano said.

But the locations also speak to the demographics that prompted Wildin to pick Washington for the first ShopHouse: urban, diverse, young professionals. Limited appeal, in other words, was baked into the concept before it was barely off the ground.


2017 Looking Bright for Restaurant Seafood Sales

January 10, 2017

surfnturf

By Christine Blank, Contributing Editor
© 2016 Diversified Communications. All rights reserved.
http://www.seafoodsource.com/news/foodservice-retail/2017-looking-bright-for-restaurant-seafood-sales

Seafood restaurants – and those that serve seafood – are expected to perform well in both the United States and the United Kingdom in 2017.

“Right now, consumers should be in a pretty good place, with regard to the economy. All of the indicators, including unemployment, are trending positive,” Darren Tristano, president of foodservice research and consulting firm Technomic, told SeafoodSource.

As a result, spending at higher-end restaurants that serve seafood will rise, Tristano said. In addition to an increase in consumer spending, United States businesses will have increased expense accounts and take clients out to dinner more.

Restaurant chains like Ruth’s Chris, Fleming’s and other upscale chains are expected to perform well, according to Tristano.

“Steakhouses will continue to pick up, and seafood will do well in the steakhouse format,” he said.

In addition, “more polished casual restaurants” such as Bonefish Grill and Legal Sea Foods will also thrive, Tristano said.

In the U.K., eating seafood in restaurants is also expected to rise, as consumers dine out more and seek healthy, sustainable seafood. Over the last year, seafood servings in U.K. restaurants increased 2.3 percent to 979 million, as restaurant visits also grew 1.5 percent, according to NPD Group – Crest in the U.K.

The biggest trend affecting seafood served in restaurants is sustainability, Tristano said. The health, ethical and environmental attributes of meals are increasingly important to consumers, according to one of NPD Crest’s top five foodservice trends for 2017.

Sustainability is here to stay – and it will continue to increase [in importance to consumers],” Tristano said.

Consumers will continue to seek out seafood for its health benefits, according to Tristano.

However, because of the inherently higher price of seafood versus other proteins, restaurant operators need to offer a mix of seafood species at various price points to “raise the appeal of the protein.”

“For example, you can have Chilean sea bass at one end and tilapia at the other end. Or, in addition to Chilean sea bass, you can add in bluegill and other types of striped bass. You can get it down to an area that is more affordable and approachable for consumers,” Tristano said.

Seafood at restaurants is already becoming more approachable, thanks to fast-casual restaurants that are performing well, such as Luke’s Lobster and Rubio’s Coastal Grill. Even quick service seafood chains such as Captain D’s are performing well, according to Tristano.

The types of seafood dishes that will perform well in 2017 include sushi, sushi burritos, poke and calamari, “a product that is becoming more approachable,” Tristano said.

“Poke is taking off across the nation,” he added. “We are seeing a lot more poke bowls and concepts that are getting into raw ahi and salmon.”

Up-and-coming sushi burrito restaurants in the U.S. include Sushiritto in New York and San Francisco, Chicago-based Sushi Burrito and SeoulSpice in Washington, D.C.

Meanwhile, the other top NPD Crest trends for foodservice operators in 2017 are:

  • Restaurants must provide different delivery options (potentially use a delivery aggregator) to complement the traditional sit down format.
  • To maintain sales growth and consumer engagement, outlets must deliver a great experience, with a choice of quality meal options.
  • Consumers are interested in buying locally-sourced food. However, they will not accept lower quality.
  • Consumers like variety but they do enjoy their traditional favorites with a fresh twist.

Striking While the Tortilla Warmer is Hot

October 5, 2016

dostoroslogo-bd9115b9

By David Farkas
http://restfinance.com/Restaurant-Finance-Across-America/October-2016/Striking-While-the-Tortilla-Warmer-is-Hot/

Mendocino Farms co-founders Mario Del Pero and wife Ellen Chen have put their money where many mouths are. Last month, the couple invested an undisclosed sum in Dos Toros, a 11-unit New York City-based taqueria chain that plans to expand to Chicago next year. “There is an unbelievable runway for them [to grow],” Del Pero declared in a recent interview.

The timing of the investment is no accident. Investors have been scouting for a viable investment vehicle in the category given the troubles at beleaguered Chipotle Mexican Grill. “I think that with the decline in traffic to Chipotle, the opportunity for other restaurants to capture share and support their desire for flavorful Mexican fare is very high,” Technomic Inc. President Darren Tristano told the Monitor. The market research firm expects Mexican fast-casual to grow 8% overall in 2016.

Del Pero and Chen invested alongside Managing Director Nick Marsh of GrowthPoint Partners, which last month made a $10 million minority investment in Dos Toros. Marsh, an early investor in the Studio City, Calif.-based premium sandwich chain, is also CEO of Chopt Creative Salad Company. “He’s a close restaurant friend that we trust,” Del Pero said.

Although Del Pero declined to reveal how much capital the couple put up, he acknowledged it was their own money. Still, he added, he sought permission for the investment from private equity firm Catterton, which has a substantial stake in 13-unit Mendocino Farms. “We made it very clear that we’re just investors, though we are a sounding board for Leo and Oliver,” Del Pero explained.

Brothers Leo and Oliver Kremer founded Dos Toros (“two bulls” in Spanish) in 2009, slowly opening units in Manhattan and Brooklyn until they added a second line in store in a busy Manhattan food-court two years ago. The addition has allowed new units to serve 450 people an hour.

Del Pero wouldn’t comment on Dos Toros AUVs or unit economics but claimed Dos Toros unit sales rivaled Chipotle’s. Before the chain’s food-poisoning problems, CMG reported volumes of $2.5 million. Dos Toros reportedly rang up $20 million in 2015.

He also said the couple would likely offer Dos Toros advice on catering and procurement as the brand scales outside New York City. “We think there is opportunity in catering. So that’s one of the things we can help with,” Del Pero offered.


Why fast-food chains are making ‘increasingly outrageous’ creations to get you through the door

September 30, 2016

imrsBy Becky Krystal
The Washington Post
https://www.washingtonpost.com/news/going-out-guide/wp/2016/09/28/why-fast-food-restaurants-are-coming-up-with-increasingly-outrageous-ways-to-get-you-through-the-door/

Call them what you will. A sign of the apocalypse. Unabashed marketing ploys. The anti-kale. However you view the latest splashy fast-food innovations, know this: They’re probably not going anywhere. At least for now.

The latest of these creations to be foisted onto America: Pizza Hut’s Grilled Cheese Stuffed Crust Pizza, which features mozzarella and cheddar baked into a crust that’s topped with bread crumbs and melted butter. Close relatives of recent vintage include Burger King’s Whopperrito and Mac n’ Cheetos, KFC’s Double Down, Pizza Hut’s hot-dog-crust pies and Taco Bell’s Doritos Locos Tacos.

Such creations, often referred to as stunt foods or limited-time offers if they’re temporary, aren’t concocted in a vacuum, especially since they can take months or even years to develop. In the last few years, the trend has grown amid efforts to lure customers back into fast-food restaurants, as well as diners’ quest for novel items to share on social media.

Now it seems like each release is wackier than the last. “Like clickbait, the concepts are so unbelievable, so shocking, so Onion-headline-esque that they work,” said Sophie Egan, author of “Devoured,” an exploration of the modern American diet. “They’re irresistible.”

The wave of headline-grabbing fast-food items has its roots in the recession, when the industry entered a slow-down period that lasted through 2014. “A lot of these companies were trying anything to get customers back” during that time, said Sam Oches, the editorial director of Food News Media.

Ask observers and analysts what particular promotion was the turning point in paving the way for successors, and you’re likely to get one of two answers: KFC’s Double Down, a bacon, cheese and Colonel Sauce sandwich that used fried chicken fillets as a bun, and Taco Bell’s Doritos Locos Tacos. (Not surprisingly, both chains are part of the same parent company, Yum! Brands, along with Pizza Hut.)

Launched in 2012, Taco Bell’s Doritos-taco mashup took two years to develop. The fast-food chain sold 100 million units in the first 10 weeks and surpassed the $1 billion sales mark the following year. “The Doritos Locos Taco was a pivotal moment in our brand’s innovation journey,” said Rob Poestch, Taco Bell’s director of public affairs and engagement.

Coming next year: The Naked Chicken Chalupa with a fried chicken shell.

Why do they do it?
Despite the effort these foods take to develop, most aren’t intended to be sustainable as long-term menu additions. “It’s almost never about making money off the product,” said Darren Tristano, president of the food industry analysis firm Technomic.

In fact, the bestselling items at fast-food restaurants tend not to be the wacky mashups, but the classic offerings — Taco Bell’s standard tacos and burritos, for example.

The point of the limited-time offers, as Taco Bell’s head of social insights, Ben Miller, told the Atlantic, is “getting people in the door.” Tristano also said it’s about taking money away from competitors and making companies seem innovative and appealing.

So why do companies need to invent excuses for you to come in? The main reason is competition, and not just from their immediate fast-food brethren. Fast-casual restaurants such as Cava Grill, Chipotle and &pizza have moved in on the fast-food market and are growing at a faster rate, said Elizabeth Friend, a Euromonitor International strategy analyst. From 2014 to 2015, fast-casual brands grew at a rate of 10.2 percent, compared to 3.1 percent for the rest of the fast establishments.

Years ago, a diner’s only option for getting food quickly was the local drive-through. Now, “It’s really easy to get food quickly with minimal effort,” Friend said, pointing to such delivery apps as UberEats and GrubHub in addition to grocery stores with hot bars and prepared food offerings.

“Convenience is a very strong factor,” Tristano said. And if fast food isn’t as convenient as other options, then brands have got to think of something else.

A crazy fast-food item might be the only nudge a diner needs to walk into a Taco Bell or Burger King. If they’ve seen news coverage or a post on social media, the restaurant might later be at the top of their mind when they’re trying to decide where to go.

Why does it work?
No doubt the visuals are especially compelling and share-worthy, which says as much about consumers as it does about the brands hawking them. “The vast majority of us, we don’t have a lot of exciting things that happen to us” on a daily basis, said Brian Wansink, author of “Slim by Design” and the director of Cornell University’s Food and Brand Lab.

By trying one of these flashy foods and photographing them, people are showing that they’re willing to try something new. And like most food photography, those social media-friendly images are aspirational. They aren’t usually representative of our diet, a cultural disconnect that Wansink, in a study of historic paintings, has shown goes back well before the advent of fast food and the Internet, let alone cameras.

The whole experience suggests that consumers are full of contradictions. We make an effort to eat well but still want to reject the health-food guilt, at least once in a while. “We want to feel that we’ve treated ourselves. We want to feel that we’ve experienced new life experiences, and food is part of that,” Egan said.

Diners are also downright curious to know what something new tastes like, which may be more human nature than food culture. “You just can’t help yourself,” she said.

So what’s next for stunt foods?

As long as people keep paying attention to them and talking about them, the short term expectation is that they’ll become “increasingly outrageous,” Technomic’s Tristano said.

In the long-term, though, the “the tide of consumer empowerment” (see: nutrition labels, the fight against GMOs, etc.) is turning, and people may begin to call these foods out as, well, stunts.

The feeling is that “it will no longer be smart business to rely on stunts, and instead [companies will] start to take more of the cues from what these fast-casual chains are doing,” Egan said, referring to fast-casual’s more customized meals, upscale decor and values regarding the environment, sourcing, health and social issues.

r they might try stunts of a different sort.

After all, Pizza Hut did recently reveal a turntable pizza box.


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.”


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.