Seeking the upside of a down market, chains aim to streamline operations

Seeking the upside of a down market, chains aim to streamline operations

Even as the economy continues to produce dour news, restaurant executives are starting to seek the silver lining, using the downturn to best position their brands for the inevitable return to more prosperous times.

In February, reports that consumer confidence had hit a 15-year low, consumer spending had leveled off, and inflation might be picking up speed magnified the need for operators to pursue improvements to their businesses.

“There are times such as these we believe it is valuable to examine our business from a variety of perspectives and look for improvement opportunities,” Brinker International Inc. [3] chairman and chief executive Doug Brooks said last month. Dallas-based Brinker operates or franchises about 1,872 casual-dining restaurants, including its flagship Chili’s [4] Grill & Bar chain.

“People tend to get more motivated when times are tough,” he continued.

(To view this week's print financial pages and accompanying charts, click here [5])

Restaurant companies have started to get creative with what aspects of their businesses they can control. Improved kitchen and labor scheduling is top of mind, sources said, especially with the help of new technology. The use of refranchising strategies, or the selling of corporate-operated units to franchisees to help defer operating costs, has accelerated throughout the industry. Another industrywide trend is the slashing of planned new-unit openings both this year and next.

“When times are good you tend to look at food and labor…and you can get away with being lackadaisical about the rest,” said David Flanery, chief financial officer at Papa John’s International Inc. [6] “Well not in 2008. We are scrutinizing every potential cost.”

At Louisville, Ky.-based Papa John’s, the company and its franchisees, which together operate about 3,015 units, are exploring numerous cost-saving initiatives, including the classification of delivery drivers as tip-credited employees, which would change the payment model. Energy-saving techniques, such as the installation of “smart thermometers” in each location, are also under investigation, Flanery said.

“It’s a mentality that will help us save a tenth here and a tenth there,” he said.

Despite any out-of-the-box thinking on cost savings, however, a company’s G&A is typically the first to be reduced. The industry so far has seen layoffs from Brinker, Starbucks [7], Domino’s [8] Pizza, Einstein Noah Restaurant Group and Rock Bottom Restaurants.

At Domino’s, the layoff of about 50 people late last month was the result of “economic realities,” company spokesman Tim McIntyre said. “To ensure we’re strong for our shareholders and our employees, sometimes you have to make those tough calls.”

In addition to G&A expenses, companies have started to explore their mix of menu offerings. At McCormick & Schmick’s [9], for example, the chain is promoting shrimp-based entrées because shrimp is currently one of the least expensive seafood items. Quick-service chains have been heavily promoting beverage items, as the profit on those items is often the highest.

“It’s not just a straight cutting of the fat,” said analyst Stephen Anderson at MKM Partners investment firm, referring to the numerous initiatives restaurants are undertaking to control costs. “It’s about being more productive.”

At the top of every operator’s list, however, is the most obvious way to improve the P&L: by increasing sales. Along those lines, executives have outlined menu, marketing and pricing strategies expected to bump sales in order to alleviate cost pressures. As the restaurant landscape grows more competitive, chains are exploring menu freshness, value and distinctive dishes. For example, Jack in the Box [10] has announced expectations for new snack and beverage offerings, KFC [11] is exploring grilled or broiled chicken options and Panera [12] is set to introduce breakfast sandwiches.

It’s a forward-thinking approach that some operators say will serve them best when the economy eventually improves.

“If you do come out the other end,” Papa John’s Flanery said, “you might actually be stronger.”