The Battle Royale

The Battle Royale

trends by Mark Gordon | Managing Editor

Independent restaurateurs need to figure out the Next New Thing - fast - in order to win the fight with big nationwide chains in 2008.

With the recent news that McDonald's will be making room for trendy coffee bars in an all-out effort to compete with Starbucks for latte superiority, it's now official: The restaurant industry changes quickly, and frequently in hard-to-predict directions.

McDonald's will be far from the only restaurant pushing for new ways to create sales in 2008.

Some well-known national restaurant chains, including Tampa-based OSI Restaurant Partners, will be looking to shed some underperforming properties and concepts this year, says Aaron Allen, chief executive officer of Quantified Marketing Group, an Orlando-based restaurant marketing and public relations firm. The goal with moves like that, Allen says, is to increase sales in core chains by refocusing on just a few brands.

Despite the topsy-turvy nature of the restaurant industry, Allen predicts there will be some other trends in 2008, from new brands, foods and menus to what's become the trend du jour in Gulf Coast business circles: Going green.

Overall sales in the restaurant industry are expected to grow about 5% in 2008, to almost $27 billion, according to the National Restaurant Association. That is smaller than in past years, but large enough to keep entrepreneurs plenty busy searching for the right recipe to compete with the country's big chains.

And even though the industry itself isn't projecting a great 2008, Quantified Marketing Group has been going through a growth spurt. Annual revenues for the company, which counts several Tampa and Sarasota-area restaurants as clients, have doubled each year since it was founded in 2001.

It has expanded internationally, too, says Allen, with customers in 12 countries.

Trend forecast

Allen, the former sales and marketing manager for the Florida Restaurant and Lodging Association, developed the following trend lines by speaking with Quantified Marketing Group's clients and analyzing industry data.

Some of Allen's top trends for 2008 include:

• Consolidation: Restaurant companies have been, and will continue, buying and merging with smaller competitors. "There's more private equity money available for the restaurant industry then ever before," Allen says.

One of the biggest deals of 2007, IHOP Corp.'s $1.9 billion purchase of Applebee's Inc., will be worth watching in 2008 as a gauge to see how this trend plays out.

Allen, though, says consolidation will also have a big impact on the independent restaurateurs that dot the Gulf Coast. The big chains will look to grab market share, he says, and the small ones will suffer. "The industry is becoming a much more competitive environment," says Allen. "We'll see a lot of mom-and-pops fade away."

Within consolidation, Allen is predicating another secondary trend. He says the casual-dining chains not on the buying side of things, such as Chili's Grill & Bar and Bennigan's Grill & Tavern, will be "forced to reinvent themselves to win back guests. Many will need to introduce new menus or conceptual designs to survive."

• Modified casual dining: In the past few years, so-called fast casual restaurants, places such as Panera, Atlanta Bread Co. and Moe's, have grown significantly, both in sales and locations. Those restaurants offer counter service, just like traditional fast-food establishments do, but have higher average checks and stay away from using margin-eating dollar value menus. "The industry has been looking to trade up," Allen says.

The next growth area is now in what Allen calls modified casual dining. The concept is the same as a large casual dining chain, such as T.G.I. Friday's, but not as widespread with regard to locations. What's more, modified casual restaurants, such as Buffalo Wild Wings, usually open in shopping or strip malls, as opposed to freestanding buildings, and tend to have specialized menus.

The modified casual category separates itself from fast casual, Allen adds, in that it has a more sophisticated decor, waiter-waitress service and a higher average check.

From a sales-to-investment ratio, the early results of this development have been good: A modified casual operation costs less than $800,000 to develop, but can generate more than $1 million in annual sales, Allen says. By contrast, fast-casual restaurants tend to cost $500,000 or less to open but usually don't surpass $1 million in annual revenues.

• Non-traditional sites: Entrepreneurs seeking to enter the restaurant business in 2008, from fast food to modified casual, need to be creative about locations, Allen says. This includes looking into opening kiosk or booth-like operations in places such as hospitals and office buildings, as well as opening concept restaurants in large office buildings or regional airports.

This is important for two main reasons: First, construction costs and lower rents are more reasonable. That presents an opportunity to put more of the revenues back into improving the business, as opposed to covering outside costs.

Second, competition is not as fierce in these out-of-the way locations, Allen says, which gives budding restaurateurs time and space to build up a brand and a customer base.

• Experiential branding: The last leg of that trend is crucial, says Allen, since another developing industry trend he sees happening in 2008 is the concept of experience-laden branding. "Restaurants can't just be concerned with good food, good service and good ambiance," Allen says. "Experiential branding is a restaurant's opportunity to build lifelong relationships with guests."

Allen suggests restaurant operators look at all aspects of the business a customer can see, from the menu to uniforms to wall decor, when considering the brand message.

• Single-product concepts: "Specialization," Allen says, "will continue as a primary factor fueling industry growth."

Allen says if a restaurant, big or small, can find a well-marketed and well-produced product, it can dominate its own niche market. As an example, Allen cites Pinkberry, a new Southern California-based chain of frozen yogurt stores that recently received a $25 million investment from the venture capital arm run by Starbucks founder Howard Schultz. Pinkberry, which so far only has locations in the Los Angeles and New York City regions, has already built a national following.

• Healthy eating: The concept of ordering healthier foods isn't just a fad, Allen says, or at least if it is, it will last through 2008. "Americans will focus their attention on portion control," says Allen, and consumers will likewise continue "moving away from trans fats."

From a business-running perspective, the downside is that the anti-trans fats craze has resonated with lawyers, too. That means restaurant chains that use trans fats, at least the big ones, are opening themselves up to potential consumer-protection lawsuits. Says Allen: "It's the next jackpot for the litigators."

REVIEW SUMMARY

Industry. Restaurants

Who. Aaron Allen, Quantified Marketing Group, Orlando

Key. Overall sales in the industry will grow about 5% in 2008, to just under $27 billion.