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Chains look to licensed products to drive revenues amid soft sales

Chains look to licensed products to drive revenues amid soft sales

While products bearing such names as Wolfgang Puck and White Castle long have graced grocery store shelves, more restaurant companies are trying their hand at the retail arena as they seek to establish new revenue streams.

(To view the charts featured in this week's financial pages, click here)

Given slumping restaurant sales and a favorable environment for retail, players ranging from the behemoth Burger King to the regional Daphne’s Greek Café to independent operators like Serafina in New York are looking for the brand exposure and incremental dollars that can be gained from sales of branded retail products, such as the Serafina restaurant’s bottled Italian sauces.

“Retail certainly becomes much more important as the economy slows us down,” said Larry Flax, co-chief executive of California Pizza Kitchen Inc., which sells premium frozen pizzas through a licensing agreement that originated in 1998. “No question.”

As pressured consumers dine out less and eat at home more, retail is enjoying a boon. The latest figures comparing grocery and restaurant sales trends show that while restaurant sector growth had outpaced grocery sector growth in 2005 and 2006, results last year were mixed. From November 2007 through January the rate of growth in grocery store sales has outpaced that of restaurant industry sales by as much as 2 percentage points, according to data collected from the U.S. Census Bureau and reported by restaurant securities analyst Jeffrey F. Omohundro at Wachovia Capital Markets LLC.

While the larger uptick in grocery store sales was due partly to higher inflation rates, even real sales growth rates between to the two categories have evened out in recent months. Starting last September, the real, or inflation-adjusted, sales growth rate at grocery stores out-paced that at restaurants. Since then, both categories have posted sales changes between negative 1 percent to positive 1 percent month after month.

Royalties from California Pizza Kitchen’s licensed frozen-pizza sales represent a touch less than 1 percent of the company’s total sales. Nonetheless, CPK’s retail-based partnerships, from its frozen pizzas to its more grab-and-go-style units in airports and sports stadiums, grew at a steady pace in 2007 and continue to grow this year, Flax said, even as the restaurant chain, which includes about 236 corporate or franchised locations, has experienced slowed growth.

Royalties from licensing the frozen pizzas totaled $4.7 million last year, an increase of 27.6 percent from the year earlier. Total restaurant sales grew 14 percent last year to $624.3 million. For the current year, CPK expects same-store restaurant sales to be down 1 percent or flat at best, the company said. But CPK expects its licensing dollars to continue to grow, especially as new line items are introduced, such as four varieties of personal frozen pizzas set to launch next month.

The retail component “has always been important,” Flax said, “but it’s growing in importance … and it’s a good feeling today to be a brand and a restaurant company.”

The notion of moving from a restaurant to a well-known brand also prompted Daphne’s Greek Café, an 80-unit fast-casual chain, to debut last month a 28-ounce feta-based spread, FireFeta, at Costco centers throughout the West. The spread retails for $8.59.

After a Feb. 15 introduction, most of the product had sold out in San Diego-area Costco locations, company officials said.

“Top-of-mind branding is extremely important right now,” said Julie Lanthier Bandy, director of marketing for San Diego-based Daphne’s. “We’re excited that people are thinking about Daphne’s more often than when they are just in the restaurants.”

Burger King officials wanted consumers to see and think of their brand even when they were not in BK restaurants. So last November, Burger King entered the retail food arena with two flavors of potato chips: Ketchup and Fries, and Flame Broiled. The chips are being sold in vending machines, convenience stores and airport locations, the company said. In addition, the chips are being tested at airport restaurants and some locations in the Northeast as an alternative to a medium French fry side item within the chain’s value meals.

“We hope it stimulates some lapsed users that for whatever reason Burger King has fallen off their radar,” said John Schaufelberger, senior vice president of global product marketing and innovation. “We didn’t pick these flavors haphazardly. … Flame broiling was obvious, and ketchup and fries is a great taste. … There was strategy there in the products we chose.”

Burger King also wanted the products to help consumers see the BK brand as a place for snacking. Many quick-service chains recently have focused on the snack, beverage and breakfast markets to pick up incremental sales. Burger King, which operates or franchises more than 11,000 restaurants worldwide, also will focus on those items in its retail strategy.

“You will not find a Whopper in the frozen section,” Schaufelberger said, “but areas of the menu we’re trying to develop, like snacks, breakfast, that is a priority for us.”

The BK Chips were not introduced as a way to help stymie the difficult restaurant sales environment, the company said, but were developed with the company’s licensing agent as part of BK’s goal to provide innovative products. Burger King, which is owned by Burger King Holdings Inc. in Miami, has licensed its brand before with The King Halloween costumes and its work with video games.

Restaurant-branded retail offerings are not always slam dunks, operators and experts said, as the quality of the product must match that of the concept’s dining experience. In addition, finding the right licensing partner, developing the correct food items and maintaining control both of quality assurance and advertising are key to success, sources said.

Taco Bell, the quick-service chain owned by Yum! Brands Inc. in Louisville, Ky., hit a roadblock in its retail extension when it came to light in 2000 that taco shells selling as part of a branded at-home taco kit had contained genetically modified corn ingredients. The uproar among some consumers caused “significant” losses to restaurant sales at Taco Bell, even though the chain restaurants did not use the same taco shells.

For T.G.I. Friday’s, retail lines of frozen appetizers and chips have actually helped restaurant sales, executives said.

“Our research suggests that with quality retail products consumers are actually more engaged with our brand and will visit Friday’s more frequently as a result of the positive awareness,” said Mike Archer, president and chief operating officer.

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