Housing crisis poses high hurdles in California

Housing crisis poses high hurdles in California

LOS ANGELES —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

When the Chicago-based operator opened his first California unit in Orange County three years ago, the restaurant was a hit. So he immediately began looking for a second West Coast location, targeting a region whose epicenter is about 60 miles east of Los Angeles called the Inland Empire, comprising large parts of Riverside and San Bernardino counties. At the time, it was one of the fastest-growing markets in the country. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

New retail centers were popping up throughout the area. Miles of open space dotted with new housing developments promised steady population growth. Economists were predicting waves of business migration from the higher-rent coastal cities, and the big-player restaurant chains were vying for top locations. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

Portillo settled on a shopping center in Moreno Valley, a city in western Riverside County. But by the time Portillo’s opened there earlier this year, the economic picture for the region had changed. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

The nation was gripped in a housing crisis of epic proportions that hit early and hard in this bedroom community. Home foreclosure rates reached record levels, and many consumers have watched their spending money dry up like the surrounding desert soil. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

“That unit in Moreno Valley had the fastest [sales] drop of any Portillo’s I have opened,” Portillo said. “It was so fast. I haven’t seen anything like this in 43 years in the business.” —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

Early on, Portillo’s sales in Moreno Valley were averaging up to $150,000 per week, he said, but by early August sales had slowed to around $70,000 per week for the 6,800-square-foot unit. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

Such numbers are not bad for a fast-casual concept, he noted, but they are for Portillo’s, considering that most of the chain’s 34 units average annual sales between $7 million and $8 million. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

So Portillo has put plans to open more restaurants in Southern California on hold for now. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

“I love California, and we were well-received there,” he said. “But these are hard economic times.” —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

Indeed, as operators gathered for the California Restaurant Association’s 2008 Western Foodservice & Hospitality Expo at the Los Angeles Convention Center Aug. 23-25, the state of the Golden State’s economy was the hot topic. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

The real estate market melt-down affecting consumer spending in much of the nation has been especially pronounced throughout the length and breadth of California, from the Sacramento market to the Bay Area all the way to San Diego County. Lenders have foreclosed on $100 billion worth of homes in the state over the past two years, and they now are repossessing some 1,300 houses each business day in California, according to a study cited this month in the Los Angeles Times. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

With the five-county Greater Los Angeles market representing about one-third of California’s economy, the foodservice market there has reeled from residents’ mortgage woes and concurrent stresses from higher gas prices and food costs and rising unemployment. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

In the Inland Empire, the economic malaise is blamed largely on the housing crisis, which has caused a rapid decline in real estate values, throwing cold water on once-hot developments of new communities there. The downturn has dashed the hopes of operators who had hoped to feed the boom and has forced some out of business. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

Home sales in the Inland Empire were climbing steadily from the mid-1990s to a peak of 29,570 in late 2005, fueled in part by the availability of subprime loans at low interest rates. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

By late 2007, home sales slowed to 11,359 and the median price of an existing home in the Inland Empire dropped nearly 17 percent to $323,911 in the first quarter, according to the Inland Empire Economic Partnership’s first-quarter report in April. Prices are expected to continue to fall. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

The meltdown of the credit market left homebuyers overextended, and many were forced into foreclosure. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

In the second quarter of 2008, Riverside and San Bernardino counties ranked second in the nation in the number of foreclosures, according to RealtyTrac, based in Irvine, Calif., an online home foreclosure listing. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

The Inland Empire had 43,600 foreclosures, or one for every 32 households, which was more than five times the national average. Stockton in Northern California was No. 1, with one in 25 homes in foreclosure. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

In July, however, other metropolitan areas—including Cape Coral and Fort Myers, Fla.; Merced, Calif.; and Las Vegas—jumped ahead of the Inland Empire in fore-closure rates, pushing the combined Riverside and San Bernardino counties to No. 6 nationally. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

That could be an indicator of a possible “bottoming out” for the hard-hit Inland Empire, said Daren Blomquist, a RealtyTrac spokesman. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

Overall, the number of Inland Empire foreclosures was up 5 percent in July over the prior month, and rates were still 106 percent higher than July 2007. But the number of homeowners in default, the first stage of foreclosure, declined over the past two months in the region, Blomquist said. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

“There are some legitimate signals pointing to recovery in the Inland Empire,” he said, “though it will be several months and probably years before things return to normal.” —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

Meanwhile, one of the ripple effects of the housing crisis is a shortage of jobs, especially in the construction and housing-related retail industries. Economists predict that by the end of 2008 the region will see the first decline in employment in 44 years: a loss of 17,900 jobs, following last year’s gain of 592 jobs and a gain of 44,700 jobs in 2006. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

Over the past year, public companies such as Starbucks [3], California Pizza Kitchen [4], The Cheesecake Factory [5] and BJ’s Restaurants have made the point that soft sales at Inland Empire locations have dragged down same-store sales. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

BJ’s, for example, saw same-store sales fall 5 percent during the second quarter ended July 1 at 10 of its casual-dining branches in the Inland Empire, Central California and Sacramento. At the same time, same-store sales were up 11 percent at BJ’s in San Diego and up 7 percent in Laguna Hills, in southern Orange County. Systemwide same-store sales were up 0.6 percent for the quarter. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

California Pizza Kitchen in the second quarter ended June 29 noted that same-store sales were down about 1.7 percent among California stores, although that figure was up 1.4 percent systemwide. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

However, during the quarter, a CPK debuted in the Inland Empire city of Chino Hills and notched average weekly sales of about $100,000—the highest in the company’s history, said Rick Rosenfield, CPK’s co-founder and co-chief executive. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

CPK locations in California typically average $75,000 per week, which is 16.8-percent higher than in the rest of the country, he added. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

“California remains our strongest and most profitable market,” he said. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

Many operators, however, note that restaurants in California have to pull in higher sales because the cost of doing business is higher. They typically cite as detrimental to business the state’s higher real estate and labor costs, heavy regulation, and the lack of a tip credit. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

For operators like Chris Mellgren, franchisee owner of an It’s A Grind [6] coffeehouse in the Inland Empire city of Corona, the problem is the fact that customers who once came in regularly for a $4 vanilla latte are now switching to a $2 large coffee. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

Mellgren’s sales are down by 8 percent so far this year compared to last year, though the downward trend began for him in 2006. Systemwide, sales at the 112 It’s A Grind units in 14 states are down 4 percent year-over-year, but company officials say Inland Empire units have fared the worst. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

Discount promotions offered by direct mail brought in some new faces, but Mellgren does not want to take the path of value pricing for the long term. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

The good news—for Mellgren, anyway—is that Starbucks is scheduled to close more than 600 underperforming locations, reportedly about 21 of which are in the Inland Empire. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

Meanwhile, he is trying to reduce expenses by cutting staff during slower traffic times and trying to negotiate a lower lease rate. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

Within the Inland Empire, Corona was designed to appeal to neighboring Orange County residents looking for more affordable housing. It is the wealthiest city in the region, where the average household income is $84,641, compared with $68,471 countywide. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

That’s in part why Taps Fish House and Brewery came to Corona. The first Taps, a New Orleans-meets-Seattle casual-dining brewpub, opened in the Orange County city of Brea in 1999 and now averages about $9 million per year in sales, said Don Myers, the company’s president. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

Taps was one of the first tenants to sign a lease in The Promenade Shops at Dos Lagos, a lifestyle center in Corona that opened in 2006, with a new residential housing complex next door and promises of an office building, condominiums for seniors and a hotel. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

“Lots of demographics pointed to perfection here,” Myers said. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

Optimism about the region’s growth potential is reflected in the design of Taps in Corona, which opened last November. The 18,000-square-foot restaurant seats up to 500 and includes an in-house brewing operation. At a cost of about $7 million to open, the branch needs annual sales of at least $8 million to see a return on investment, Myers said. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

However, Taps Corona’s sales are being rung up at the annualized rate of about $7 million so far this year. Smaller-than-expected guest counts in the dining room have been made up somewhat by strong weekends and a lively happy-hour business, but they probably won’t hit sales targets for another two to three years, Myers said. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

Recently, the restaurant launched a three-course, prix-fixe menu for $24.95, including options such as wild salmon, filet mignon medallions and chocolate soufflé. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

The goal is not just bringing in new business but getting guests to come back early and often. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

“If you can keep your guest counts up, when it all comes up again, you’ll be in better shape,” Myers said. “Good operators are going to withstand. You just have to dig deep and dig hard, and never take away from quality.” —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

Meanwhile, the company continues to grow—but not in the Inland Empire. Taps owner Joe Manzella also owns and is rebuilding The Catch restaurant in Anaheim, and the company plans to debut an as-yet-unnamed steak-house concept in Brea next year. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

Still, some restaurateurs remain high on the Inland Empire. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

Armando Benitez and his family own five locations of family-dining concept Brandon’s Diner—including one in Moreno Valley opening this month—and three units of Carnitas Mexican Grill, all in the Inland Empire. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

Only one store in Riverside has seen a decline of about 2 percent in sales so far this year, although the 2,000-square-foot restaurant typically averages about $70,000 per month, he said. Others, such as his 3,200-square-foot unit in Rancho Cucamonga, average twice that. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

Benitez credited the fact that his restaurants offer big portions of from-scratch cooking at check averages typically less than $10. —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

“Nobody has money right now to spend,” Benitez said. “My friends say I’m crazy to open another restaurant right now, but we’re OK. I guess I’m just lucky.” —Don’t ask Dick Portillo to open any more of his fast-casual Portillo’s hot dog restaurants in Southern California—at least not any time soon.

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