Theme Restaurants Revisited

 

 

Where does an examination of the restaurant industry start?  With the basics of course.  In Part One of this two-part series, we will review the broad, underlying demand trends that are supporting growth in the industry as a whole.  That will be followed by an analysis of some of the advantages as well as the disadvantages of the industry from an investment perspective. Next month we will evaluate the strategic factors that support the idea of integrating theming and entertainment into a restaurant concept ­  the factors that make a winning concept – and discuss the implications of a new generation of theme restaurants as anchors to entertainment projects.

 

“To Theme or Not to Theme

 Is That a Question?”

 

During the past 18 months or so, the restaurant industry as a whole has been besmirched by the highly publicized financial problems and failures of a select group of theme restaurants.  These include privately-held concepts such as Dive! and Television City and also public entities, including Country Star, Planet Hollywood, and Rainforest Cafe.  Because of this publicity, all restaurateurs have had to suffer considerably more intense scrutiny and skepticism than normal in their dealings with investment partners and capital sources.

 

Let’s face it; as a business nation, we are imbued with an overwhelming sense of the herd mentality (particularly acute among equity and debt capital providers), and we find that it is much easier and safer to criticize than to compliment.  In fact, an exciting, new category of product seems to have come and gone.  No one wants to be called a Theme Restaurant any more,  even when they know that’s what they are.  It is a winning category of entertainment retailing with a bad reputation.

 

The category’s imminent demise is most often associated with two alleged facts: 1) theme restaurants never serve good food, and 2) the consuming public has grown tired of themes. 

My own experience counters the first allegation.  I’ve never had a bad meal at any of the theme restaurants.  At worst, I have had mediocre-quality food, tagged with a higher-than-average price.  At best, I’ve had an exceptionally perfect and memorable cheeseburger. Perhaps the issue is really more one of expectations ­ whether one’s expectations of menu choice, quality and service were realistic for the genre.  The second argument is countered by a recent edition of Nation’s Restaurant News that featured the 1999 Hot Concepts! award winners: five of the six winners were themed restaurants, including Bahama Breeze, Kahunaville, King’s Fish House, Razzoo’s Cajun Cafe and Rodizio Grill. 

 

But that doesn’t get to the heart of the matter.  Unexamined dismissal of any restaurant concept is unfortunate and unwise. There are powerful lessons to be learned from the failures of some of the more ambitious concepts.   Many underlying strengths of these failures may never come to the attention of new entrepreneurs and investment decision-makers if these concepts remain unexamined.  A failure to probe both the failures and successes of entertainment retail concepts is an invitation to repeat the mistakes of  predecessors or to miss innovations that might bring financial rewards if applied to a new project. 

 

“The U.S. Restaurant Industry in the

New Millennium

 A Billion Dollars a Day!”

 

The food service industry is such an integral part of daily life in America that on any day one-half of all adults will eat in a restaurant or another food service location.  By the year 2000, according to the National Restaurant Association, Americans will spend over one billion dollars per day to eat food prepared away from home.  This spending is up from $100 million per day in 1970, a 30-year compound annual growth rate above eight percent, significantly above the rate of inflation. 

 

The commercial restaurant sector accounts for approximately 70 percent of total food service

industry sales.  Full-service and fast-food restaurants each account for roughly 45 percent of that total, or $350 million a day for each category.  Other facilities, primarily taverns/bars, represent the remaining 10 percent of the total food service sales. 

 

One reason for continued growth in restaurant sales is that food prepared away from home is no longer considered a luxury.  Eating away from home is now a fact of today’s convenience-driven lifestyles.  Fewer and fewer meals are prepared or eaten at home.  In 1955, when Walt Disney opened Disneyland, 25 cents of the average American’s food dollar was spent on food away from home.  In the year 2000, 50 cents of every food dollar will be spent away from home.

 

During the past five years, a number of lifestyle studies were conducted by the National Restaurant Association and other industry organizations in order to understand the underlying psychographics of restaurant patronage.  One study found that half of all adults believe that eating out is an important, normal, and necessary aspect of their lifestyle.  Another report indicated that 70 percent of the reasons given for dining outside the home are unrelated to the restaurants themselves.  The reasons relate to lifestyle considerations ­ lack of  time and lack of desire to cook at home.  And the other 30 percent of the reasons for dining out related to “enjoying the atmosphere.”  Only five percent said that dining out was for special occasions and celebrations.  In another study, 40 percent of adults said that they were not entertaining at home as often, and 45 percent said that they would prefer a restaurant environment that is “stimulating and active.” 

 

These findings confirm that a basic demand-push by consumers is supporting continued growth in restaurant sales generally, and they help explain the rapid growth of full-service, casual-dining and theme restaurants.  It is what the millennial market wants. 

 

“X Factor Demographics”

 

Consumer demographic information supports the following well-known influences on per capita food service industry sales:

 

People with higher incomes spend more on food away from home.  Households with incomes of $50,000 to $70,000 spent 50 percent above average.  Those with incomes over $70,000 spent 127 percent above the average on food away from home. 

 

Non-family households (singles and unrelated roommates) spend more than family households. States with a higher proportion (28 percent) of non-family households reported 44 percent more per capita full-service restaurant sales. 

 

More women in the workforce results in higher per capita sales.  States with a higher proportion of women in the workforce (more than 46 percent) reported 8 percent more per capita full-service restaurant sales. 

 

Although Generation X consumers tend to frequent fast-food and quick-service facilities more than full-service restaurants, their dining habits could presage a shift towards full-service facilities, and especially theme restaurants, as they mature.  Consider the following:

 

Xers spend a higher proportion of their total food budget on food away from home than other

age groups and eat at restaurants more frequently than others:  40% of Xers dine out at least twice a week, compared to 28 percent in the 35+ age group; 61 percent of Xers dine out at least once a week compared to 54 percent in the 35+ age group.

 

Ambiance is important to Xers as part of the overall value received when eating away from home.  65 percent of Xers stated they would be interested in restaurants that offered a “lively, entertaining atmosphere” compared to 30 percent in the 35+ age group. 

 

53 percent of Xers are interested in live entertainment, music or display cooking compared to 41 percent in the 35+ age group. 

 

Xers are much more interested (61 percent) than older customers (35 percent) in full-service restaurants that offer all-you-can-eat specials. 

 

Xers want good value for the price they pay for a meal and seek to be “wowed” by unique menu items, food presentations, ambiance or service. 

 

Xers are more interested than other customers in restaurants that offer a self-service salad or food bar. 

 

Considering these factors, the conclusion is that restaurants which offer a complete product (food, service and ambiance) that appeals to the 40 million-plus Generation X consumers will be in a good position to build a loyal customer base that will keep their dining rooms full well into the new millennium. 

 

“Restaurant Industry Investments

Advantages vs. Disadvantages”

 

For the restaurateur, it is important to understand the restaurant industry as the investor sees it. 

 

“Advantages”

 

Popular Product – Restaurants represent a popular product with mass market appeal and mass distribution potential (e.g., multiple outlet potential).

 

Growth Potential – Generational trends indicate increased spending on food away from home on a per capita and total basis. 

 

No Functional Obsolescence – In Maslow’s hierarchy of needs, food is one of the three basic

requirements for survival.  Hunger will not go out of style.

 

Few Barriers to Entry – As a category, restaurants typically require a relatively small amount of capital for business start-ups, and freestanding or in-line store sites are plentiful. 

 

Multiple Concepts and Deals – There are as many concepts and investment opportunities for investors to choose from as there are entrepreneurs.   Investors can be very selective in their evaluation process. 

 

Multiple Exit Strategies – If successful, there are many ways to exit the business.  The range of lucrative exits includes the sale of the assets, the sale of the intellectual property (branding), and the franchising or licensing of the concept to individuals or corporations in the private or public sectors.  

 

Fragmented Corporate Sector – Compared to many industries, the corporate sector of the restaurant industry is relatively young and fragmented, particularly in the casual-dining and upscale segments.  This provides significant opportunities for market share capture, making profits and creating an impact on the industry. 

 

Disadvantages

 

High Failure Rates – The restaurant industry is notorious for one of the highest rates of failure of any new business.

 

Management Intensive – As a service business, the industry requires competent management in multiple sectors, including marketing/customer relations; personnel training and development; menu engineering; food and beverage purchasing; cost control and preparation; sanitation; and

accounting/internal controls. 

 

Cash Business – Because restaurants are inherently cash businesses, they invite theft or

fraud from all personnel – service, management and ownership.  Lenders and investors are aware of the need for strong internal controls, but it is impossible to guarantee honesty.  Silent “partners” are an unfortunate fact of life in the restaurant industry. 

 

Few Barriers to Entry – One of the advantages of the industry also happens to be a disadvantage.  Success will typically invite competition in a myriad of forms, from new restaurant facilities within the local market to concept clones in the regional market. 

 

Unit Level Contributions – Historically, sales growth among many restaurant organizations, both public and private, was often the result of expansion in the number of units rather than growth in individual store sales.  In the past, this information was not often clear to the investors.  Today’s investment climate will bring an intense scrutiny and analysis of unit-level contributions.

 

Information Overload – Operating a restaurant, and certainly a chain of restaurants, is a complex management problem.  Statistics from various departments and facts necessary to evaluate competitive market conditions require accurate record-keeping and analysis  This is a business that demands efficient management of information on a unit level as well as locally, regionally and nationally.  Few entrepreneurs have the willingness or the ability to manage this information as will be required by today’s capital providers. 

 

In the second part of this review, we will examine the advantages and disadvantages of theme restaurants as a category, evaluate the strategic factors that support the integration of theming and entertainment into a restaurant concept, and make some predictions regarding the second generation of theme restaurants.  The millennial market’s lifestyle insures that theme restaurants will be an important part of future entertainment retail real estate projects.

 

J. Paul DeMyer is a principal in Rochlis & DeMyer (R&D) with Jeffrey A. Rochlis, the former executive vice president of Walt Disney Imagineering. Mr. DeMyer is a leading theme and entertainment real estate consultant who has headed thousands of entertainment specialty projects throughout the world including retail malls, hotels, resorts, restaurants, theme parks, entertainment centers, mixed-use facilities, sports recreation complexes and convention/civic centers. He is a member of the E.S.P. Brain Trust. Mr. DeMyer may be contacted at Rochlis & DeMyer, 2607 24th Street NW, Suite 4, Washington DC 20008; 202-588-0800, Fax 202-588-8005; e-mail: JPDeMyer@aol.com.