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Retail Trends

Restaurant Rebound

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No one is singing “We’re in the Money,” that old tune about post-Depression hopes, quite yet. But there are positive signs that the restaurant industry is poised for a significant rebound in 2011.

An index of consumers’ anticipated restaurant spending in the next 90 days is up 11 points since the recession bottomed out, according to research by Prosper that was analyzed by international consulting firm Kurt Salmon. That led to improved expenditures in 2010: By the end of last year, same-store sales growth was on the increase, and overall restaurant spending had recovered about 4 percent. There was a slight dip in dining-out spending in January, and consumer confidence in the economy improved, though it was nowhere near the 2007 levels of exuberance.

The increase in spending is driven by two factors, says Todd Hooper, retail and restaurant industry strategist at Kurt Salmon. “Consumers really are trying to rethink how they’re going to spend discretionary money,” he says. “Away-from-home spending on food has a couple of dimensions. There is the aspect of doing something for yourself, for entertainment or because it’s easier. These people think they’re going to spend more and they are spending more. They’re not as concerned they’re going to lose their job. For others, they eat out because they simply have to, because they are time-starved.

“People who are in this category are thinking about how much they spend eating out, but when you look at their actual behavior, they are having a hard time cutting the convenience of it,” he says.

So with more dollars in the market, what restaurant concepts are poised to win? “Those players that were strong in the tough years are really likely to be strong when the wind is at everyone’s back instead of at everyone’s face,” Hooper says.

Concepts that work
Hooper names the criteria for winning concepts:
Famous for… “The fundamental in restaurants is you have to be famous for something,” Hooper says. “This is not new.”

Quality of the food. This has emerged as extremely significant in the last few years. “At each stage of the hierarchy, from QSR to fine dining, there are different reference sets,” Hooper says. “The other thing that’s important is the cues that the consumers will take to assume this quality is there.” Restaurants that prepare the food in front of a customer, allowing for customization, earn high marks in this area. “Consumers subconsciously put a lot of value in this.”

Distinctive environment. “It’s always been true, but even more in tough times — going out to eat is an escape from the world’s troubles,” Hooper says. “It is a small extravagance that people can avail themselves of. That’s become increasingly important.”

Integrating a bar. “Figuring out a way to make [a bar] part of the proposition is important for the consumer, and the economics are important for the operator,” he says.

Leading Hooper’s list of likely winners are Panera Bread and Chipotle Mexican Grill. Both restaurants have survived the economy with strong consumer ties and neither has shrunk back from growth. Both also do well with consumer advocacy: About 70 percent of Chipotle customers say they are extremely likely to recommend the restaurant to friends; Panera had about half of their customers in that category. Both were significantly higher than competitors, according to Prosper’s research.

“They’re very strong on ‘famous for’ and ‘quality advantage,’” Hooper says. “They continue to have very effective consumer offerings. Given the financial success that these businesses have, they’ve got a financial wherewithal to maintain their position.”

Denver-based Chipotle continues to emphasize its “food with integrity” concept that includes organic produce and naturally raised animals. “Our performance continues to be driven by our focus on doing just a few things but doing them better than others,” Steve Ells, founder, chairman and co-CEO, told analysts in a February call.

For Panera, headquartered in St. Louis with more than 1,400 outlets, the emphasis will continue to be on food quality, William Moreton, president and CEO, told analysts in the company’s fourth quarter earnings call. “For the last few years, we’ve approached our menu by thinking about establishing category ownership. To us, this has meant using the talents of our food development group and the size and scale of our supply chain to innovate and differentiate our food through quality.”

Lesser-known favorites
Not all of the winners are quite as well known — or as large.

Hooper singled out Five Guys for its “fresh take on an American classic.” The Alexandria, Va.-based burger outlet currently has more than 750 stores in the United States and Canada and plans to open 200 more this year, about the same number it opened in 2010.

While the menu is comprised of burgers, hot dogs and French fries, it is hardly limited. “They tout that there are about a quarter-million permutations of what kind of burger you can have,” Hooper says. “It’s perceived to be a great burger that’s fresh — the meat is never frozen. The fries are cut when you come in. It’s a distinctly higher offering than a typical burger.”

Potbelly Sandwich Shop, a franchise with more than 200 locations, is a “concept with a lot of momentum,” Hooper says. “The motif is warm and the quality of the food really leverages the notion when people see the food being prepared in front of them and can specifically tailor what’s happening. It leaves consumers feeling that they are in control.”

There are two chains, in particular, that are benefiting from the increased spending by those in upper-income brackets.

Hooper believes that The Melting Pot, the Tampa-based franchisors of fondue restaurants, will continue to grow. “Fondue is … a four-course indulgence in terms of the experience,” he says. “The stores themselves are often funky and feature unusual architecture. The food tends to be pretty pricey, but people perceive freshness and quality when they’re involved in the actual cooking.”

Wine pairings and signature cocktails at the chain’s 142 North American locations helps The Melting Pot achieve high scores for bar integration, as well.

Texas Roadhouse, a Louisville, Ky.-based chain of steak and rib outlets, is another winner, Hooper says. This year, it expects to add another 20 locations to the 345 already in operation.

“The food itself is high quality and in generous servings,” Hooper says. “They really push the made-from-scratch idea. The ambiance is high energy, with jukeboxes and line dancing.”

Travis Doster, Texas Roadhouse’s director of public relations, says the chain has a 90 percent intent-to-return rate among first-time visitors, while its most loyal customers — those visiting twice a month — account for nearly two-thirds of its revenue. The chain doesn’t advertise nationally, putting its money into the food, with an on-site baker and butcher at every location.

If Texas Roadhouse has brought longnecks and line dancing to fine dining, Lucky Strike Lanes has brought tuna lollipops and brie to the bowling alley. The Los Angeles-based chain makes Hooper’s list for its inventive atmosphere, vibrant bar and upscale food. “You envision your typical bowling alley with the chips and melted cheese food — it’s not that at all,” he says. “They’ve got mini burgers, better pizzas and Asian dipping options.”

Though it has only 18 locations, the celebrity clientele gives it a certain cache. It also is a popular spot for corporate events. “Corporations are starting to spend more, and that’s another reason for Lucky Strike to be on the list,” Hooper says. “These events offer a way for people to get introduced to it on someone else’s dime.”

Not everyone will experience sunny skies: Hooper believes that chains without a distinct atmosphere will continue to suffer. And fast-food restaurants that rely on those with lower incomes will continue to struggle, largely because of continued financial issues for their target clientele.

“Across the board, anybody that isn’t very distinctive on the things that we’ve talked about will be lost in the sea of options out there,” he says.