Steak and Sizzle

Steak and Sizzle

CEOs by Jean Gruss | Editor/Lee-Collier

Ruth's Chris Steak House will soon have more restaurants in Florida than any other state. How the company grows its business is a lesson in restaurant management.

Craig Miller wants to deliver both steak and sizzle at Ruth's Chris Steak House.

As the president, chief executive officer and chairman of the board of the 99-restaurant chain based in Heathrow, near Orlando, Miller is counting on baby boomers, families and cab drivers to boost revenues and profit.

Cab drivers?

Miller refers to the "taxi-cab set," or those who dine at Ruth's Chris on special occasions. He recalls taking a taxi shortly after he was appointed CEO of the company in 1994. The cab driver told Miller he would save his money so he could treat his mother to a special meal at Ruth's Chris once every year.

"That's an awesome responsibility," says Miller, who realized then that the special-occasion diner was a key component of the company's growth. That special-occasion diner now accounts for about one third of the company's revenues.

Miller, 55, who was in Bonita Springs recently to open the company's 99th restaurant, shared some of the company's strategies for managing growth and building customer loyalty with his brand of sizzle. It's advice any Gulf Coast service-related company can use to boost sales and profits.

Ruth's Chris, which became a publicly traded company last year (symbol RUTH, recent stock price $19), saw revenues rise 19% to $184 million in the first nine months of this year versus the same period a year ago. Although operating income was relatively flat, net income rose increase 99% on lower interest and other non-operating expenses. Miller's compensation was $909,884 in 2005, not counting stock options, according to the company's most recent proxy filing.

Attract diverse customers

Steak houses have typically been the bastion of male customers, drawn by oversize portions and the stuffy decor that's heavy on dark wood-paneled walls.

At Ruth's Chris, executives decided they needed to broaden the appeal in order to boost sales. While not losing their male clientele, they decided they could attract more families and women by making some changes.

What's more, they realized that attracting retired boomers would mean appealing to both men and women. They lightened up the decor, added better lighting and made the restaurants less intimidating. So far, the strategy has worked. Families and women now make up 40% of customers.

Bonita Springs, Miller says, is in the sweet spot for the restaurant's demographics. Wealthy retirees live just south of the new restaurant in affluent Collier County, families are likely to drive down from Fort Myers and business clients are likely to patronize it because it's just a few miles from the airport. On a Monday night shortly after opening, the restaurant already had reached the maximum 170 reservations.

"Some of our biggest competitors are the local, well-run restaurants," says Miller.

Ruth's Chris started a customer-recognition program that pampers customers just as local restaurants do with their best customers. Called Friends of Ruth, members have a guaranteed reservation whenever they choose to dine. The restaurant keeps track of customers' preferences, such as what scotch he likes to drink or how she likes her steak cooked.

Each restaurant's manager identifies 50 to 70 Friends of Ruth, mostly based on how frequently a person dines in the restaurant. "We have once-a-week diners," Miller says.

Because the restaurants are only open for dinner, Ruth's Chris takes special care to manage reservations. For example, most customers prefer to reserve a table for 7 p.m. But if the manager can persuade the customer to come at 6:30 p.m., there's enough time for a second seating later that evening.

The task has become easier with the Internet. Customers can reserve a table online by choosing a time frame. That allows the manager to better manage the flow of customers so that the restaurant isn't overwhelmed at one particular time.

Now, diners make about 20% of all their Ruth's Chris dining reservations online. In tech-savvy San Francisco, that's now approaching 50%. "You can manage the process more effectively," Miller says.

Lately, gift cards have also become popular. Ruth's Chris sold $31 million worth of gift cards in 2005, a 19% increase over the previous year. Miller expects gift-card sales to rise another 20% this year.

Fatten the bottom line

To boost profits, Ruth's Chris has made a big push into wines.

It has trained its sommeliers and offers more wines by the glass. Well-trained sommeliers can persuade customers to trade up to a better, more-expensive wine. "Wine sales is all about education," Miller says.

Each restaurant has a large collection of more than 250 wines and usually about 50 are available by the glass. Bottles cost from $28 to $700. A large inventory combined with many choices by the glass translates to higher sales. Indeed, wine sales have been growing at a 15% rate, twice the rate of the overall business, Miller says.

Miller also has rearranged the kitchens to be faster and more efficient. Special employees called "runners" must serve a steak from the oven to a customer's table in less than 45 seconds or it loses its sizzle. That's despite the fact that steaks come out of an 1,800-degree oven and onto a plate heated to 500 degrees.

In addition, the company raised prices twice this year, by 1.5% in January and 0.7% in August. Miller says there hasn't been any resistance to the increases, mainly because its customers are affluent.

The moves appear to have paid off. Sales at restaurants opened more than one year are up 5.8% so far this year. This is an important metric because it excludes the unusually large sales at recently opened restaurants.

In fact, new restaurants seem to do especially well. The three new restaurants Ruth's Chris opened in 2005 generated revenues of $7.4 million each on an annualized basis, versus about $5.2 million for those existing restaurants opened more than one year.

Future growth

Ruth's Chris estimates that the 50 most populous markets in the U.S. could support another 75 to 100 restaurants. In smaller areas, the company estimates it could open another 25 to 50 restaurants.

So far, the company has managed growth by building its own restaurants and franchising. About half the restaurants are company owned and the other half are franchised.

Over the next several years, Ruth's Chris will open five to eight company-owned restaurants and four to six franchisee-owned restaurants.

"There's two things you need: money and people," Miller says. Since Ruth's Chris is a publicly traded company, it has access to capital. But that's not to say it's easier being a public company. He estimates complying with government regulations of publicly traded companies has cost about $2 million, which is enough money to build another restaurant.

But the biggest challenge is finding the right people to franchise. "There's no public market for that," he says.

Still, Ruth's Chris shouldn't have trouble finding worthy partners. Demand is so strong that the company has doubled the development fee it charges for a new, franchised restaurant to $100,000. In addition to paying a 5% royalty on gross revenues, each new franchisee must now pay another 1% for national advertising.

Miller says the increased national exposure has helped boost sales. For instance, Ruth's Chris has enlisted radio and television commentator Sean Hannity to be the company spokesman, mostly based on his appeal to a male audience.

It's not hard finding people to work in the restaurants either, despite a relatively low unemployment rate in Southwest Florida. Miller attributes that to the relatively low number of upscale-restaurant chains. For many people, working at Ruth's Chris is a step up in their careers.

"We can afford to pay better," Miller says.

And apparently, many of the rest of us can afford to eat better, too.

How Ruth's Chris got its name

Ruth Fertel, a single mother of two, bought a restaurant in New Orleans called Chris Steak House with $22,000 borrowed on her home in 1965. She changed the name of the restaurant to Ruth's Chris Steak House and over time built more restaurants while she franchised others. Fertel sold the company to Chicago-based private-equity firm Madison Dearborn in 1999, which then took it public in 2005. Fertel died in 2002.

Advice for startup restaurateurs

Craig Miller knows his way around the kitchen.

The 55-year-old president and chief executive officer of Ruth's Chris Steak House has decades of experience building restaurant companies, including as president and CEO of Uno Corp.

Here's his advice to entrepreneurs who want to start a restaurant.

• If you don't really enjoy serving other people, don't get into the business.

• Don't make the mistake of thinking the restaurant business is easy.

• Be prepared to be hands-on in every aspect of the business. You can't be an absentee owner.

• Train employees to be focused on serving the customer. Explain to them your philosophy of serving others.

• You need money and lots of it to start out. It costs $200 to $300 per square foot to build out a new Ruth's Chris Steak House, for example.

• Most of all, don't open a steak house (laughs).

By the numbers

RUTH'S CHRIS STEAKHOUSE INC.

Nine months ended Sept. 25 (in thousands)

2005 2006 %Change

Revenues:

Restaurant sales 145,490 174,340 20%

Franchise income 7,790 8,732 12%

Other operating income 351 431 23%

Total revenues 153,631 183,503 19%

Costs and expenses:

Food and beverage costs 45,141 56,014 24%

Restaurant operating expenses 66,692 78,707 18%

Marketing and advertising 5,187 5,530 7%

General and administrative 10,448 16,117 54%

Depreciation and amortization 4,737 6,318 33%

Hurricane and relocation costs 1,191 613 ?48%

Pre-opening costs 905 858 ?5%

Operating income 19,330 19,346 -

Other income:

Interest expense, net ?7,205 ?1,671 -

Accrued dividends and

accretion on mandatorily

redeemable senior

preferred stock ?1,891 - -

Insurance proceeds, net - 1,415 -

Other 138 ?42 -

Income from continuing

operations before

income-tax expense 10,372 19,048 84%

Income-tax expense 7,025 13,186 88%

Income from continuing

operations 7,025 13,186 88%

Discontinued operations,

net of income-tax benefit 424 71 ?83%

Net income 6,601 13,115 99%

BALANCE SHEET

12/25/2005 9/24/2006 %Change

ASSETS

Current assets:

Cash and cash equivalents 8,985 2,020 ?78%

Accounts receivable,

less allowance for

doubtful accounts 12,820 11,894 ?7%

Inventory 4,592 4,941 ?8%

Prepaid expenses and other 2,156 3,737 73%

Escrow for pending acquisitions - 11,878 -

Deferred income taxes 262 - -

Total current assets 28,815 34,470 20%

Property and equipment, net 63,850 73,876 16%

Goodwill 30,533 53,691 76%

Deferred income taxes 9,192 13,475 47%

Other assets 1,806 2,253 25%

Total assets 134,196 177,765 32%

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:

Accounts payable and

accrued expenses 23,752 23,891 -

Deferred revenue 18,639 15,930 ?15%

Deferred income taxes - 2,911 -

Other current liabilities 1,029 1,432 ?39%

Total current liabilities 43,420 44,164 2%

Long-term debt 38,500 62,000 61%

Deferred rent 11,730 14,380 23%

Other liabilities 281 448 59%

Total liabilities 93,931 120,992 29%

Total shareholders' equity 40,265 56,773 41%

Source: Securities and Exchange Commission filings