Gettin' Busy

RH Staff

For some, 2004 was a rough year. In February, Janet Jackson had a horrific wardrobe malfunction, while in June, Triple Crown hopeful Smarty Jones choked at the Belmont. In late summer, Hurricanes Charley, Frances and Ivan came through Florida like a gang of Hell's Angels, and a short time later, Martha Stewart found herself eating prison food, which is not a good thing. In October, it was clear that getting a flu vaccination was harder than holding on to your beer at a Pacers-Piston basketball game. It was a mighty hard year.

But, hey, the restaurant industry hung tough. And if you believe the National Restaurant Association—and who wouldn't—the year ahead will be pretty good, too.

A sure bet
Even the best thoroughbreds will let you down, but the restaurant industry is as close to a sure thing as there is. 2005 will mark the 14th consecutive year of real sales growth for the industry. According to the NRA, industry sales will likely reach a record $475.8 billion this year—that's an increase of 4.9 percent over last year (or 2.1 percent when adjusted for inflation).

That compares with a 2.4 percent real gain last year.

The full service segment will retain its reputation as the big man on campus, with 2005 sales projected to reach $164.8 billion, an increase of 5 percent over last year. The quick service segment will lag behind with projected sales of $134.2 billion.

Unfortunately, the year ahead may not be quite as economically fertile as the first half of 2004. Nevertheless, restaurant sales growth should outpace overall U.S. economic growth, says the NRA. While disposable personal income is expected to match last year's levels—and that's important for restaurant growth—the national economy hasn't yet picked up the steam everyone had expected. In an October NRA survey, about half of full service restaurant operators said their local economy was hindering business.

Bob Derrington , an equity research analyst at Morgan Keegan & Company, says a full-blown recovery has not yet kicked in. "After the November presidential election, we did experience strong job growth and increased manufacturing activity," he says, "yet consumer spending remains sluggish."

The stage has been set for growth, says Derrington, but he predicts it won't come until the second half of the year. Until then, however, the industry must be careful, he warns.

"This industry is extremely competitive, and it's forcing operators to be very aggressive about luring customers," he says. "The ones who are winning the battles aren't necessarily the operators, but rather the customers."

While the small operators may be struggling, overall the economy is in good shape and likely to improve with the reelection of President Bush, says economist Stephen Moore, president of the Club for Growth. "This is a great time to be in business," he says.

Tom Quindlen , president and CEO of GE Commercial Finance, concurs, saying he's seeing a lot of positive numbers coming out of the bigger restaurant brands because of families eating outside the home. "We are bullish on continuing to invest in restaurants."

The strong survive
Everyone's hoping the economy will improve because there's no disputing that price increases in commodities, utilities and fuel costs all played havoc with the bottom line of restaurant operators late last year, says Jamie Strobino , COO of Not Your Average Joe's, a Boston-based growth chain. As a result, smart operators had to find ways to be more efficient and creative. Those who did should be in a great position to thrive when the economy finally kicks in this year, he says.

The management crew at Not Your Average Joe's spent a good deal of time last year shoring up its infrastructure and systems. It also hired uber chef Tim Soufan to oversee its food and beverage operation. As a result, the nine-unit chain will add three more units next year.

"For us, that's rapid expansion. But we can do it because we've got our ducks in a row and I'm convinced the economy will eventually come around to support it," says Strobino.

Michael Symon , the chef/owner of Lola Bistro in Cleveland's trendy Tremont neighborhood, cruised through the economic anemia of the last few years better than most, yet he and his wife/partner, Liz, did not sit on their hands. Like Strobino, they got creative. In their case, they converted wasted space above their restaurant into a private dining room. The incremental business they now take in from private dining accounts for nearly a fourth of their total sales.

Creative as it was, that move is small change compared to their next, which is to relocate their landmark restaurant to downtown Cleveland, which is desperately in need of a transfusion. Before Lola opens next October at its new site, the old site will be renovated and reopened as Lolita, a more casual concept. Some are saying the plan is insane, but that's what they said when the Symons opened the original Lola several years ago in a neighborhood where it was easier to get mugged than find so much as a baloney sandwich. Tremont is now home to many trendy restaurants and retail businesses.

"Yeah, it's a bit scary," says Symon, who can be seen cooking on the Food Network. "But we've established a strong business and it's time to take another chance. We were fortunate to do well when the economy wasn't so hot, so I'm convinced we'll be in great shape when the economy recovers. I have high hopes for the year ahead."

So does Ron Paul , the president and CEO of Technomic. He says the economy may not be barreling along, but restaurants are now so much a part of everyday life that they are no longer a luxury, they're a necessity. Even dramatic increases in gasoline prices could not affect the industry, he says. "Consumers may not be driving the distances they once did to restaurants, but they're still going to restaurants, just closer to home."

With any news, good or bad, there's always a catch. As the economy begins to improve in a noticeable way, Strobino warns, employees are going to begin looking for better job opportunities. Employers who have been less than fair or kind to their staffs could face some major problems. Labor issues, in fact, were one of eight trends the National Restaurant Association urged operators to be aware of in its 2005 forecast report. It's no wonder, when you consider this industry will require another 1.8 million employees over the next 10 years, according to NRA projections.

A recent survey by the Society for Human Resource Management confirmed Strobino's concerns. It found that 75 percent of U.S. workers are considering switching jobs this year. Simply put, if you're a jerk boss, you could be facing a mass exodus when the economy improves.

Brad Saltz , director of SS & G Financial Services, says no matter what state the economy is in, labor will always be the most uncontrollable part of the business. The cost of labor will continue to go up faster than any other operating expenses, and those who offer the best packages (salary, benefits, health care) will end up with the best employees. "American society embraces taking care of people, and while that's good for society, it puts a big burden on businesses, particularly small ones."

On that note, you might look to the example set by Phil Greifeld , the president and CEO of the 400-unit Huddle House. The family dining chain recently celebrated its 40th anniversary and 40th year of compstore sales increases. He attributes the chain's success to its focus on creating long-term relationships with employees and customers.

"For us and the entire industry, the biggest challenge will always be people," says Greifeld. "We work so hard at developing good people and making sure there are always plenty of growth opportunities. When customers come to our stores it's like coming home because our servers know customers' names and what they like. Happy employees make for happy customers."

Huddle House also puts a strong emphasis on keeping its managers happy. Large cash incentives, vacations and other rewards are routinely doled out to the best managers. Greifeld, apparently, subscribes to the old adage: Employees join organizations, but they leave managers.

Better food, better experiences
If ace foodservice consultant Clark Wolf could kiss Las Vegas on the lips, he would. Get him started, and he'll give you a hundred reasons why the city has become one of America's premier vacation and dining spots. And many of the trends that are taking place in Las Vegas can be translated to the rest of America, he says.

"You'll find it all in Las Vegas, from five-star restaurants to great burger bars," says Wolf. "But what you won't find, to a large extent anymore, is big buffets with bad food. People are no longer willing to put up with bad food because there are so many opportunities for good food." In Vegas and elsewhere, an American restaurant style has become far more prevalent, he says. That style is comfortable and fun. And when it comes to comfort food, which never goes out of style, America's definition of it is constantly evolving. For many, sushi is now considered comfort food, he says.

What is no longer comfortable is the no-carb craze. It has clearly receded, but don't expect it to go away, says Wolf. "It got out of hand and a lot of low-and no-carb products that were created were simply stupid. But it did wake health-consious consumers up to the idea they should consider how many carbs they eat."

Wolf likened the low-carb craze to the way Cajun food spun out of control after it was introduced years ago to the nation. "Poorly misinterpreted Cajun food fell by the wayside and we were left with a regional, flavorful food."

The folks at Noodles & Company should know where the low-carb craze stands, and they confirm Wolf's conjecture. "We're sure the whole low-carb hysteria is over," says Mary Beth Lewis , CFO of the fast casual concept. Though it added noodle-less dishes, the demand for such dishes has fallen off.

Wolf also fears Asian food is another trend dangerously close to wearing out its welcome. "Asian flavors are being melded into every cuisine imaginable, and I'm afraid we are nearing overkill." After all the pretenders are weeded out, he says, look for more authentic regional variations of Asian to rise.

Whatever food trends come or go during the year ahead, most are convinced 2005 will be good to them. But keep in mind that even in the best years, good restaurants tank because their owners are asleep at the wheel. So raise a strong cup of coffee in the air and toast 2005. It's going to be a good ride.