Heard on The Restaurant Street

image credit: Time Inc.

I caught Jim Cramer’s act on Mad Money Monday night. I was particularly interested when he was announcing his 10 bull markets. I heard “retail” and my ears perked up. Then, the “restaurant sector." What? Although restaurants fall into the category of retail, Jim felt that restaurants deserved special mention because they are a “barometer of consumer confidence”. Cramer is impressed with the charts of Yum Brands (YUM), Cheesecake Factory (CAKE) and Darden Restaurants (DRI). So is Jim right?

I also attended the Strategies and Outlook for the Restaurant Industry event in NYC on Tuesday, hosted by J.H. Cohn, LLP. I tend to look to Gary Levy, who heads J.H. Cohn’s Hospitality practice, and the esteemed panelists he brought together, for good market insights. Here is my general take-away:

· Lenders are back, but only for bigger deals. Franchisees are still being ignored, which will slow up growth. Most lenders are looking for EBITDA north of $15 million.

· Equity is still available. Some equity investors are actually, and finally, looking at the lower end of the middle market for opportunity where, in some cases, very early, savvy and experienced investors can play, add value, and realize higher returns with compelling concepts. Historically, this is just for private investors. But, if there is a good 5-10 unit chain with compelling unit level economics, a solid concept that has demonstrated some success in multiple markets, then there is appetite.

· Another new sector being sandwiched between fast casual and casual is being referred to as “Convenient Casual” Not sure about this one, but ok. Remember Home Meal Replacement?

· Private equity is looking for an Italian Chipotle. Why wouldn’t they? Or, even an Asian Chipotle for this Convenient Casual category.

· With the cost of capital around 8.5% and the industry averaging about 7% returns on invested capital (other than Wall Street darling Chipotle at 18%) no one is making any money. Jim, a little help here please?

· The better use of a 6,000 square foot casual dining footprint is, well, 3,000 square feet. Lose the servers enjoy a casual dining check average with takeout volume and better margins.

· Roger Matthews from Goldman Sachs, sees 2011, even 2012 as the start of real recovery in the restaurant sector. Paul Westra from Cowen and Co. sees March, 2010 as the start of the recovery for foodservice. I vote for Paul.

From my seat, there is a certain positive buzz on the street. I do like what I see, at least in San Francisco, Los Angeles and New York where people are spending money at restaurants. Attitude is what I look for, both B2B and B2C. Provided we all believe it, manifest it and leverage the new business lessons we have learned from the past few years, I still believe we are headed for a slow and steady recovery this year.

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Comment by Barry K. Shuster on April 8, 2010 at 1:33pm: The buzz on Main Street...

Based on our statistics (Restaurant Startup & Growth magazine), during the 12-month period between Jan 31, 08 and Jan 31 09, 54,189 restaurant business license applications were filed in the U.S. These mostly represent independents, including small chains.

During Jan 31, 09 and Jan 31, 10 the number had dropped to 49,740. That's an 8% decrease, but during a soft economy, to say the least. We'll see how things shape up moving forward.

My first point: the "restaurant dream" is still alive in the startup and emerging restaurant sector. These are not publicly trade enterprises, but even if the average investment of these restaurants was a conservative $350,000, and only 70% of these applicants opened their doors, that represents over $12 billion. Bear in mind, a good percentage of that money most likely came from personal savings, friends and family, and angels. Institutional lenders have never been keen on startups, even in the best of times.

My second point: Entrepreneurs in this business have been beaten up in this economy, but they still want to get in the game.

Paul Bartlett, CEC, FCSI, the principal of KitchenSolutions, LLC in Baltimore, MD, has several recommendations for his independent QSR clients going up against the big boys. Among them:
1. Local relationships with the community of customers, vendors and pubic relations outlets.
2. Tailoring marketing opportunities to local preferences – “for example, cooking classes and special promotions that feature local community interests.”
3. Development of intelligent purchasing agreements with vendors. “Focus must be on win-win negotiations that involve margins, drop size and frequency of service. Economies must be carefully considered, not left to chance.”
4. Stress regional uniqueness. The reasons for success are “often rooted in a particular strength or market niche that they fill better than other players. Emphasize the signatures that have built the business and constantly refine them to accommodate the loyal customer base. Communicate through special events, promotions and directed media that you are alive, vibrant and engaged.
5. “Don’t whine. Work hard.”

You can read more about this in the May issue.

Comment by Charles Feldman on April 8, 2010 at 10:04am: Remember when all the CPG companies wanted to dominate food at home as well as food away from home? I think we all saw what happened next. General Mills spun off and became Darden, Pepsi-Co became YUM Brands, etc. The demands on EBITDA were so great that these companies found buying retail space in grocery stores a proposition they could better control. So I agree with you that finding financing will be an exceptional challenge for new start-ups and even existing foodservice businesses. It will only go to those chains that have created possibly a new niche, have generated some Buzz/traction and manage all the HR, operational and variable cost components to achieve an exceptional ROI. One thing I know for certain is that we all need internal fuel and dining out, purchasing carry-out, or having delivery will be continue to be a necessity because of time challenges in our busy lives.

Comment by Rod Guinn on April 8, 2010 at 8:30am: Paul Westra knows his stuff. Anecdotal evidence from a few (but definitely not yet all) my clients and contacts matches his view.

The only problem with your suggestion to solve 6000 sq ft by moving to 3000 sq ft is that there's still a place in this world for the full-service model; it just requires imaginative operators who offer something for which the consumer will pay the added freight.

Comment by Annette Aaron on April 8, 2010 at 8:09am: Interesting comment Convienient Casual. Good new buzz word. When I was in the design/fashion industry I used to describe my designs as "Casually Elegant"

I can walk on one popular block of restaurant row and see 1 restaurant filled with happ, drinking people and the rest totally empty. That's not recovery.

Consumers are creating ways to eat at home with pizzaz. Chiping in to hire a chef or each guest bringing a specialty food. It's socializing and it's affordable.