GROWTH'S ON TAP

Gina LaVecchia

Yard House rolls out the barrel—lots of them—as it brews up expansion plans.

GROWTH'S ON TAP

Though the perception exists that Southern Californians prefer ultra-healthy beverages like wheatgrass and green tea, an emerging restaurant chain is tapping into these customers’ thirst for more mainstream refreshment, while at the same time sating its clientele’s penchant for casual, Asian-influenced dishes.

Yard House—whose name is derived from a Colonial American pub tradition of offering 36-inch servings of beer to weary stagecoach drivers—is a sud-lover’s ultimate destination, whether a customer opts for one of the three-foot servings—yards—or more modest half-yard or pint-sized glasses.

Not surprisingly, the concept was hatched during the microbrewery craze of the mid-’90s. But one of the company’s founding partners, Steele Platt (now c.e.o), had the idea that more variety could be offered, and more staying power for the concept thus achieved, with more of a "macro" approach. That is, serving up the broadest selection of beers, lagers and ales on tap anywhere—more than 400 selections between the three Yard House locations. (Long Beach, Costa Mesa and Irvine.)

It is this massive collection of brews, plus a much fancier "American Fusion" menu than you would imagine a beer joint might offer, that differentiates the concept, Platt contends. "We’ve been able to create a unique niche...I know every restaurateur believes they possess that, but if you’re trying to categorize us, you’ll have a hard time. We don’t fit into the brewpub, or the nightclub or the sports bar or even the restaurant category."

So what, then, does he call Yard House? "We try to let the customer define it, based on their wants at the time," says Platt. "We don’t ask if they’re eating or drinking when we seat them. We want them to feel comfortable whether they’re just getting a beer and wings, or an entire meal," says Platt, who adds that at the end of the day, checks average out to about $15.00 a head. "You can sit there and just have a beer, while your neighbor has a rib eye. No one frowns if you don’t order food." Sounds nice, but how can such hospitality be profitable? "Larger volumes," Platt explains. "A broad market base. Last night [a Thursday], we had 2,000 people through the door. We don’t try to target a specific group. We keep the appeal wide. We also have a lot of dayparts, not just lunch and dinner. We target the dining public from six to 10; and the music gets louder and we go after the bar market with appetizers, beer and drinks after that. We utilize that same table, that same chair. It’s good time management, maximizing our sales per square foot."

He offers more explanation on that "bar vs. restaurant" question: "The beer selection and the taps at the center of the space give the restaurant a definite bar feeling...so we knew that it needed to be managed properly, and that was where having a good menu was important. If the food wasn’t good, we’d be a bar, and we’d just get people coming in to drink." The beer to food ratio is "heavy," Platt admits. And indeed, 30% of sales come from beer sales, 55% from food. (Wine accounts for 5%; liquor, including a 15-item martini menu, 10%.) "But we manage it carefully, discourage intoxication." He adds, "The secret is in the balance. Food drives alcohol sales, and alcohol complements food. We never try to push more alcohol, but we always try to support our food with it."

But first, some history: The company was formed by Platt and his original Yard House partner, Steve Reynolds. The buddies met in Denver in the 1980s when Platt, a University of Denver business and restaurant management grad, was running the first of many eateries and clubs he has launched over the past two decades. At that operation, Kailua’s, Platt met Reynolds, who was the liquor distributor serving that operation, and the two men formed a friendship.

By 1995, both Platt and Reynolds had each separately relocated to Southern California, and Reynolds caught up with his old buddy, and proposed a partnership by which they’d open a chain of restaurants together. Over dinner one night, the chums sketched out a business plan on some cocktail napkins, and the skeleton of the Yard House was formed.

Some of the concept’s elements were borrowed from another bar-restaurant operation Platt owned a decade earlier in Denver, the Boiler Room, which featured 20 beers on tap, basic "pub grub" and classic rock played in the foreground. Platt sold the Boiler Room at a 200% profit in 1991 before relocating to L.A. That success gave the partners confidence. "We knew the Yard House would work because of the success of the Boiler Room," Platt recalls.

It didn’t take long to find a suitable venue in a recently-vacated nightclub on Long Beach’s waterfront. The duo sunk their money—and funds from a group of investors—into gutting the space, adding a larger kitchen, and turning the dance floor into what is now the massive island bar.

The most important step in constructing the beer Mecca was to allocate space for the element most integral to the concept: The 400 different brands of beer and their 400 corresponding tap handles. But in this novel idea they hit a major snag: The bar space, big as it was, just couldn’t handle that many handles. The only solution was to whittle the number of brews down from 400 to 250.

Even this comparatively smaller number was not easy to execute—nor was it cheap. Platt and Reynolds invested a half-million dollars in a two-story keg room and draft system that features more than five miles of beer lines connecting the thousands of gallons of beer with the bar. Above the keg room, 27 pumps circulate more than 3,000 gallons of coolant every hour to keep the beer at the correct serving temperature, 32 degrees.

At the rate of 200 kegs per week, Yard House suds, with the high profit margins typical of beer, helped the Long Beach unit generate $4.3 million in first-year sales (’95)—a number which has gone up impressively each subsequent year. (A stepped-up focus on the menu helped, too. More on that in a minute.) This year, the 10,000-square-foot Long Beach unit will fetch a foamy $12 million in sales, while its second unit, a 9,000-square-footer in Costa Mesa, will yield $7 million.

So much for the assumption that Southern Californians would snub the average Joe beverage. "I didn’t do market studies to see how it would be received, because beer was hot at the time, and because the Boiler Room in Denver had worked well," recalls Platt. "We were able to create a hook—being the largest beer house in the state—and we took it to another level, treating it like wine and properly training staff about the products."

In 1998, balancing that beer focus with a better menu became top priority for Platt, Reynolds, and their new managing partner Harald Herrmann, who came aboard in ’96. They brought on and made a partner of executive chef Carlito Jocson, who upgraded and expanded the menu, and the check averages, by making Yard House an eating—not just drinking—destination. Indeed, the upscale-casual menu now serves to define the Yard House as a restaurant, not a beer joint: Sure there are wings, but the menu ensures that Yard House will never suffer a veto vote because it serves only "pub grub."

But don’t look for culinary trail-blazing here, says Platt. You won’t find it. What you will find is a formula, he proudly admits, that appeals to the sophisticated dining masses who populate Southern California. Says Platt: "We weren’t out to create our own style or to prove anything with the menu, but to just make what people like and what they buy, and make sure the quality, style and flavor are great."

That menu boasts more than 100 items, from Crisp Pear Salad to Half-Pound Cheese Burgers; from Buffalo Wings to Grilled Lamb Chops; from Nacho Platters to Pepper Crust Filet, Wasabi Mashed Potatoes and Corn Risotto. As with the beer, there’s a no-slacker rule. "Everything on menu is a seller," Platt says. "If it doesn’t move, it gets replaced."

At 17,000 square feet, the newest Yard House (Irvine) is the chain’s largest to date, and, in fact, one of the largest restaurants in California. Next are Rancho Mirage, near Palm Springs, scheduled to open in November. More Southern California markets, including San Diego and Santa Monica are planned. Northern California, Arizona and Austin are also on the radar screen, but Platt and his partners are taking it slowly—about one opening every six months. Blessed with just a handful private backers, "We have the luxury of growing at a wise pace," Platt says. Though the goal is to saturate the Southwest, he adds, "We’re not being pushed by anyone, so we can be smart. The name of the game is not growth, it’s success."

With its third unit having opened last month in Irvine, 41-year old Platt and his partners are preparing to open several additional units throughout Southern California beginning this Fall.

CONCEPTS OF TOMORROW EXTRA

Capital Quest: Three Stages of Restaurant Financing

Whether you’re just starting out or well-established and looking to expand, financing is a critical decision. The types of financing available to you will largely depend upon of where you fall in the "Restaurant Life Cycle."

Stage 1: Getting Started.

Paul Fleming of P.F. Chang’s and Jeff Ruby, a Cincinnati restaurateur, are alternate funding success stories. Fleming raised start-up money from his customer list, and Ruby actually sold $400,000 of food shares.

At this stage of limited budgets, find a closed restaurant that can be renovated to suit your needs on a shoestring budget ($100,000 to $250,000) and concentrate on the necessities. Only raise $25,000 to $50,000 from each investor at a time instead of wasting time searching for unrealistic amounts.

A restaurant needs to show an obvious amount of success—through high sales or increasing trends in same-store sales—before moving to the second stage of financing. Remember the stock trader’s rule: Drop the losers and let the winners ride.

Most entrepreneurs must start at ground zero in order to develop their concepts into realities. The goal during this period should be to get the restaurant open any way possible. You’ll need creativity and persistence. Be open to alternative sources such as "angels," customers, family and friends to help finance this stage. Traditional resources, like banks, are unlikely to provide financing unless someone established is willing to sign a loan or the applicant has net worth such as real estate or stocks to pledge.

Stage 2: Turn Your Restaurant Into a Company.

Bank loans are riskier than individual investors. You will probably need to personally guarantee repayment. The process is slower, too, since banks generally issue short-term loans one at a time and require some portion of your cash flow to repay the debt. Investors allow you to grow faster, but they dilute your ownership and may hinder your ability to sell the company.

After choosing the best route, you must be successful and repeatable before moving to Stage 3. Success is measured through good sales, profits (not just cash flow, but actual accounting profits) and unit economics.

This stage can be pursued when the established restaurateur knows he can expand the restaurant into a company. Here, you can approach banks or individual investors, depending on your goals and attitudes. To decide how you want to get your next level of financing, ask yourself:

• What is your risk tolerance?

• What is your desire for partners?

• How fast do you want to grow?

Stage 3 : Becoming a Growth Company.

Banks are both hot and cold to the industry—mostly due to their lack of knowledge—but a few are loyal to restaurants, such as Bank of America and Citicorp. Again, loans from banks are generally short-term, which slows growth and leads to the basic problem of financing long-term assets, (building and equipment) with short-term debt. While banks require personal guarantees and more equity than other resources, their rates are generally the lowest.

Non-bank financiers, including CIT, CNL, Finova, FFCA, CAPTEC, AMRESCO, Peachtree and American Commercial are reliable lenders to the industry. This type of financing is very industry-friendly and provides options like equipment leasing, sale/leaseback and securitized lending. Although their rates are slightly higher than banks, the terms are better, offering 5 to 7 years for equipment loans and 10 to 20 years for real property.

Non-bank lenders can usually finance a higher proportion, and may not require a personal guarantee. Due to longer terms and higher borrowing capacity you can grow faster—but investigate all clauses. Many loans have high-prepayment penalties—5 to 20%—of the loan balance, and are difficult to combine with other financing sources.

The final option is venture capital, which is not readily available at this time. However, as dot.coms fail and restaurant valuations become more attractive, it is likely that V.C.s will open their minds and checkbooks to eateries. Consider V.C. if you desire fast growth and are confident of your exit strategy. This strategy helped to fund Buca di Beppo before its IPO.

Lastly, although you may have a vision of your concept, you should have a detailed business plan to show potential investors and lenders, using the help of an experienced advisor if necessary. Knowing what stage in the "Restaurant Life Cycle" you are in and selecting options that best fit your needs will set you in the right direction.

In this stage, many financing options become available, including banks, non-bank lenders and venture capitalists.