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Experts: Sales still ripe in far-flung U.S. destinations, but not for long

Experts: Sales still ripe in far-flung U.S. destinations, but not for long

Randy Schoch, founder of Desert Island Restaurants LLC in Scottsdale, Ariz., has been dealing with slowing sales among his restaurants in Arizona, Colorado and Utah for months now as cash-strapped consumers dine out less frequently. But the downturn didn’t seem to affect business at his Ruth’s Chris Steak House and Romano’s Macaroni Grill franchises in Hawaii until mid-September.

In Anchorage, Alaska, restaurateur Robert McCormick says his two restaurants have shown no signs of a downturn, though operators there are bracing themselves for the economic perfect storm to hit sometime next year.

Meanwhile, in the U.S. territory of Puerto Rico, operators have been dealing with a recession for the past three years, though not for the same reasons that have impacted restaurants on the mainland. There, the economic picture is starting to look brighter, operators say.

For Schoch, McCormick and other restaurateurs operating in Hawaii, Alaska or Puerto Rico, an outlying location can be both a blessing and a curse. While being geographically removed from the U.S. mainland can mean higher operating costs, it can also mean different cultural opportunities and temporary insulation from an economic downturn.

For example, Hawaii has been a much-sought-after location for many mainland-based chains as tourism to the islands climbed steadily over the past decade. Those that have opened units there in recent years include Nobu, Yard House, Morton’s Steakhouse and The Counter. Longtime operators such as The Cheesecake Factory and Wolfgang Puck’s Spago have reported that their units in Hawaii are among their highest grossing.

At the same time, Hawaii-grown concepts such as L&L Hawaiian Barbecue, Sensei Seafood Restaurants and Teddy’s Bigger Burgers have been expanding rapidly, despite higher food costs there because of the expense of shipping goods from the U.S. mainland.

Soaring gas prices earlier this year further exacerbated the food cost issues operators long have suffered in Hawaii. As a result, restaurateurs throughout the islands have been turning to local sources, fueling a new generation of farmers producing an exciting range of ingredients, from farm-raised abalone and grass-fed beef to heirloom tomatoes and exotic salad greens.

However, largely because of the global recession, fewer guests are visiting Hawaii to enjoy such benefits.

Arrivals from the mainland were down 17.3 percent in August, and though the state’s tourism industry was sustained over the summer by an increasing number of visitors from emerging markets like China and Korea, the worldwide downturn is expected to slow travel from those countries as well.

Earlier this year, two major airlines to Hawaii, ATA and Aloha Airlines, stopped service to the islands. Further, despite a growing number of value-priced travel deals to Hawaii this fall, researchers are predicting that tourism next year will drop to the lowest levels since 1991.

Tourism is the engine that drives Hawaii’s economy, and the slowdown is expected to hurt the many state residents whose livelihoods depend on the influx of travelers.

Schoch expects guest traffic to decline about 10 percent by the end of the year at his seven Ruth’s Chris and Macaroni Grill units. Still, he notes, trends are much worse among the company’s two restaurants on the mainland, which are down more than 25 percent.

“Hawaii doesn’t have as much competition,” says Schoch, whose Desert Island Restaurants also franchises the Thaifoon Taste of Asia and Ling & Louie’s Asian Bar & Grill brands. “And Hawaii has been a little immune to all this until about six to nine months ago.”

Now, he adds, the downturn has arrived.

“It’s not just our company,” Schoch says. “It’s not just our state or our country. It’s the world. We’re like everybody else. Globally, we will have a lot of problems for the next four to eight quarters.”

Yet, unlike the mainland, Hawaii’s home values haven’t dropped dramatically. The foreclosure filing rate in October of one per 1,266 households in the state is more than 200 percent higher than the year-earlier period, but much lower than the national average of 1 per 452 households, according to RealtyTrac, an online foreclosure listing service.

While banks are failing on the mainland, Hawaiian institutions are reporting record earnings. Schoch says that’s probably because Hawaiians didn’t buy into the risky home loans that have dragged own the credit market on the mainland.

“It’s kind of a cultural thing there,” Schoch says. “Hawaiians don’t like to spend beyond their means.”

Chains like L&L Hawaiian Barbecue have benefited from Hawaii’s unique culture, says Bryan Andaya, L&L Franchising vice president and chief operating officer.

Based in Honolulu, L&L offers traditional plate lunches—two scoops of rice, one scoop of macaroni salad and a meat of choice with gravy—which he calls “Hawaiian comfort food.”

The cuisine has received a boost in fame from President-elect Barack Obama, who is reportedly a fan of the plate lunches he grew up with in Hawaii.

With an average check of $10 to $12 and generous portions, L&L is seeing an uptick in sales at the company’s 80 locations in Hawaii as people trade down from higher-price options, officials say.

The chain has another 100 units on the mainland, mostly franchised, where sales are down 10 percent to 20 percent, Andaya says. Still, the chain continues to grow, and the first international location of L&L is scheduled open in New Zealand soon.

Another value-priced concept born in Honolulu is Teddy’s Bigger Burgers, a three-unit chain with a fourth on the way. Franchisees plan to bring the quick-service concept to Seattle and Japan next year.

Founder Ted Tsakiris says the chain has had double-digit sales growth this year. The 1,000-to-1,500-square-foot units average about $1.2 million to $1.3 million in sales, he says. The average check is about $8 to $9 per person for premium, cooked-to-order burgers with exotic toppings, such as grilled pineapple or Thai-style peanut sauce.

If anything, the state’s rising unemployment rate has helped the company attract a career-minded workforce after years of struggling to find qualified employees, he adds.

“We’re stacked to the gills with associates that already come with the pedigree to become corporate operating partners or members of our franchising division,” Tsakiris said. “This is going to support our growth clip very well.”

Operators in Alaska also are asking, “What recession?”

McCormick, financial manager of the upscale-casual brewpub Glacier Brewhouse and adjacent fine-dining French-Italian restaurant Orso in Anchorage, says sales were up in the third quarter and so far into the fourth.

Consumer spending does not appear to be dropping in Alaska, he adds. During the summer months, when sales tend to be almost double that of the shorter winter months because the days are longer and more people are in town, McCormick’s two restaurants were busier than ever.

Because Alaska is an oil-producing state, many there benefited from the high fuel prices of early 2008.

Alaska suffered a housing crisis in the 1980s, McCormick notes, so state residents were smarter when the more recent housing bubble started building. Alaska’s foreclosure filing rate of 1 in 1,072 households in October is only a 2-percent increase over the previous year.

Next year, however, may be a different story, says McCormick, who also serves on the board of the Alaska Cabaret Hotel Restaurant & Retailers Association.

“In previous financial downturns, Alaska runs six to nine months behind the rest of the country,” he says. “We’re feeling nervous about the future. It’s quite likely [the downturn] will catch up with us, especially as the price of oil goes down.”

In Puerto Rico, the high price of oil has also been a big issue for restaurant operators. Electricity on the island is generated by oil, and skyrocketing fuel prices have raised energy costs significantly.

Popeyes franchisee John Brodersen, owner of Brodersen Management based in Milwaukee, operates seven of his 29 restaurants in Puerto Rico. His electricity rates for units on the island are three times what units average on the mainland.

“All seven units opened with no electrical hookups,” he says. “You have to get a generator that runs on diesel or natural gas. I had one unit that ran on a generator for nine months before I got electricity.”

Such bureaucratic delays are typical in Puerto Rico, Brodersen says. Taxes are also higher on the island and business permits can cost twice what they cost on the mainland—and that’s only if the permit is not held up for months by red tape, as is common, he says.

Since 2006, the U.S. commonwealth has reportedly seen negative growth. Puerto Rico’s unemployment rate is about 12.1 percent, but, rather than blaming the woes of the mainland, observers are attributing the recession there to the island’s outdated economic model and inefficient local politics.

Brodersen, however, says he is encouraged by the election in November of Luis Fortuno as governor, a fiscal conservative from the New Progressive Party whose campaign was based on promises of rebuilding the economy with pro-business policies.

Some economists, however, say the economic crisis on the mainland will slow efforts toward a turnaround in Puerto Rico.

For Brodersen’s Popeyes units, average unit volumes are higher on the mainland and profit margins are more favorable, but the franchise operator sees a lot of room for growth in Puerto Rico. The island has become a base for pharmaceutical manufacturing plants, for example, establishing a solid base of salaried employees.

“That allows us to sell a lot of chicken,” Brodersen says.

The U.S. economic crisis is also likely to force chain operators to close underperforming units, and Brodersen says he’s ready to scoop up real estate, hopefully at bargain prices.

“I’m waiting for the big shakeout,” he says. “I think it’ll happen in Puerto Rico, too.”

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