Why Theme Restaurants Fail
Why Theme Restaurants Fail
Planet Hollywoods orbit is degenerating. Hard Rock Cafe is falling on hard times. Fashion Cafe is looking threadbare. In an effort to discover why some restaurants fail and why others succeed, E.S.P. put the question to a handful of very busy real estate brokers around the country who specialize in restaurants. Wall Street and its echo, the daily press, tends to look at all failures as a function of cost vs. revenue, and all successes as revenue vs. cost (When the only tool you have is a wrench, everything starts to look like a nut).
While cost vs. revenue is the mathematics of profit and loss, the forces behind the formula are food and service, according to the brokers we interviewed.
Theme restaurants will continue to grow with or without Wall Streets help.
"If the focus is on dancing gorillas, or guitars signed by Madonna, or whatever, theyre going to have a problem. You have to focus on the food," said John Higden of Higden & Higden (512-343-0418), an Austin, Texas-based restaurant brokerage firm. "People will only buy so many T-shirts or squeaking frogs." Higden recalled that during Bill Clintons election campaign, the buzz-phrase was "Its the economy, stupid. Well, its the food, stupid."
No argument to Higdens view could be obtained from Thomas P. McCarty of Restaurant Brokerage (303-432-0047) in Arvada, Colorado, or from Paul G.W. Fetscher of the Great American Brokerage (212-557-7272) in New York City, or from Jerry Becker of Hiffman Shaffer Associates Inc. (312-332-3555) in Chicago. Each has his own way of approaching the topic, but all agree that consistently good food and excellent customer service are the only essential ingredients in a successful restaurant recipe.
"The only way you build loyalty is through good food," said Fetscher. "I dont have to go to a theme restaurant, but I do have a propensity to eat two to three times a day."
"The rumors concerning the demise of theme restaurants are greatly exaggerated," said Becker. "Wall Street investors may have abandoned the restaurant concepts that relied more on hype than on consistent good food. Theme restaurants will continue to grow with or without Wall Streets help. The well thought-out restaurants that consistently deliver on food and service will be around. Currently, theme restaurant concepts such as Buca di Beppo, Dave & Busters, and Champps Americana, to name a few, fit this criteria. On the other hand, Country Star, Fashion Cafe and Planet Hollywood, who rely on hype and glitz rather than good food, are destined to experience problems or death. Theme restaurants have been around for some time and will continue, provided they deliver on a well-crafted environment, with good food and service."
"The theme concept is a business concept, not a restaurant concept. A chain is a function of finance more than food."
"These places are not known for great food," said Leslie Siben, a restaurant broker with Winick Realty (212-792-2643) in New York City. "Its very hard to operate with food as your primary concern in what I call stadium dining, the 80s concept, which is what these places are doing, catering to the mainstream palate."
"So they focus on the tourist, and the problem with the theme is that they (tourists) get tired of it. Themes dont maintain a fresh interest for repeat business, they dont cultivate your mainstay audience, by definition. Then, when you get too big, you become more of an overhead operation. The theme concept is a business concept, not a restaurant concept. A chain is a function of finance more than food."
What is a theme restaurant? Is there any such thing as a non-theme restaurant? E.S.P.s consulting brokers agreed that, for the most part, every restaurant has a theme it tries to convey to its customers, some more successfully than others. In searching for weird themes, we found a few that havent received national attention yet. For example there is Adam & Eves, located in a resort called Naked City in Indiana, whose theme is nudity neither the customers nor the employees wear any clothing. Not a candidate for national exposure, but perhaps a limited rollout. Then there is Live Bait, a New York joint that looks like a trip to the rest room will land you in a wood shack with a hole in the floor and a bucket of corncobs hanging on the wall. A Confederate flag adorns one fractured wall, and the menu is 40s Mississippi sharecropper. Wall Street is not knocking down their door, but maybe itll fall off on its own.
Every restaurant, from JoJos Pizza & Bar (theme: pizza and booze, know-the-owner casual) to Smith & Wollenskys (theme: the best steaks in the country) has a theme. Its in the name, the image and the reputation, if not the decor. If its in the food and service too, and theyre a hit, thats all that matters. The problem arises when the theme is everything and the restaurant is relegated to third-class status or worse. Customers will return the sentiment, and investors will soon follow.
To be sure, there are those in the restaurant business who still believe that there is a difference between a "theme" or "specialty" restaurant and any other restaurant, and that the "theme" restaurant industry is suffering a setback. These are the cost-vs.-profits Wall Street believers like Gaylord Entertainment. This company recently bought out the 49 percent of Wild Horse Saloons it didnt already own from Levy Restaurants and, in its announcement of that purchase, declared that "the specialty restaurant industry is not in an expansion mode right now." That statement was attributed to Terry London, CEO, who also said, "We view Wildhorse Saloons as entertainment venues more than restaurants..." Indeed, a heavy entertainment and-or tourism draw can make an otherwise bad restaurant financially successful, because it eliminates the need for repeat customers, which is the desired result of establishing good food and service.
"If your customer base is non-repeat," said McCarty, "such as in tourist areas, you dont have to execute well. In Cancun, for example, you might go into a Planet Hollywood and buy a T-shirt, but not in Denver."
"If your customer base is non-repeat, such as in tourist areas, you dont have to execute well"
The very nature of celebrity-spawned restaurants creates additional problems with staffing, McCarty said. "The staff attracted are there for the glitter, rather than to provide a good guest experience. They want to hang out there in case the stars show up." Higden echoed that observation: "There was more attention on who showed up at an opening party" than on the food and service fundamentals, at the trendy celebrity bistros, he said.
The industrys problem now is one of overcrowding in what Higden tagged the "hyper-theme" restaurant genre, or what Fetscher calls "eatertainment" centers. "There are now more than 600 eatertainment restaurants, many of them sharing the same market," Fetscher said. "As much of a fan as I am of restaurants, I dont know that Landrys Inc. needs five restaurants in Myrtle Beach, South Carolina, or that I need in Myrtle Beach a Hard Rock Cafe, a Planet Hollywood, and an All Star Cafe all within sight of each other." He characterized the Myrtle Beach restaurants as "underperforming, according to reports."
The problem arises when the theme is everything and the restaurant is relegated to third-class status or worse.
Even the cost of building a trendy restaurant, which often runs to $400 per square foot, is not necessarily a factor, if the restaurants emphasis is on the fundamentals, McCarty said. "Palamino, The Cheescake Factory, Puccinis, they all spend $300 to $400 a square foot... Cost is clearly a factor as the sales drop," he noted. "The restaurant business is not rocket science. The most expensive cost you have is losing a customer. If a customer has a positive experience, hell tell one person. If he has a negative experience, hell tell 10 people."
Wall Street, in fact, can be part of the problem, McCarty agreed. If a restaurants focus is on dollars rather than food and service, and the numbers slip a little, then the bean-counters start putting pressure on to tighten up on costs. A deadly cycle is started. "Wall Street tightens the screws," said McCarty, "then, instead of giving a customer a free dessert because of a problem, the waiter has to ask the manager. The manager knows he needs another half a percent profit this month, so he says no, just tell them youre sorry. Now youve lost a customer." As sales decline, the screw tightens further and customer service suffers more. "Then it becomes exponential and logarithmic," McCarty said.
"Another piece of the formula is people," said Higden. "If youre growing too fast, you cant grow your culture. You need to recreate the enthusiasm and the corporate culture, and if it grows too fast you cant do that. Without those factors, the real estate can be brilliant, and youre going to have to do it again. You have to have passion for food and passion for serving people."
Cost is certainly a factor to investors, Fetscher noted. Investors want to see a minimum return of 15 percent, meaning that "a comfortable ratio is 1.5-to-1 sales to investment." For a mammoth undertaking like David Copperfields in New York Citys Times Square, he said, this may never happen.
"Its going to cost more to build David Copperfields in New York than any other restaurant ever built. Current reports are that it will cost $30 million to turn the key. For this unit to be successful its got to at least gross the investment."
"The center area (of David Copperfields) will be 100 feet high. A table of patrons will be swept to the top of it, sawn in half and will reappear elsewhere in the restaurant, without knowing themselves quite how it happened. Thats an illusion. The delusion is the expectation of this being a $30 million gross operation," Fetscher said. Good food will help, but it wont do it all, he added. "With the Joseph Baum/Michael Whitehead Co. involved, I expect the food to be, not gourmet, but substantially above the mark of most other eatertainment restaurants."
Fetscher said the second location for David Copperfields in Orlando, Florida, "with a build-out more like $20 million, will have a better probability of grossing their investment."
Design is another critical factor. Fetscher talked about the original Dive in Los Angeles. "It was cute the Yellow Submarine come to life. The Levy Brothers out of Chicago did a very interesting job, especially in developing a submarine menu... But when I went there, there was no one there. It seats nearly 300, but no place you sat did you get a feel for the excitement of having a lot of people there. It was far too fragmented and broken up into areas."
The underwater illusion, which included a very expensive series of "portholes" that were linked video screens allowing a digital fish to swim across one screen and show up in the next. But because of the underwater theme, "there was a blue tone to the lights. In blue light, people dont look good, and food doesnt look good. So Im sitting with 20 people who dont look too healthy, food that doesnt look very appetizing, but the fish swims from screen to screen."
"After the first year it grossed $6 million on a $9 million investment, then settled into $5 million a year on 60 percent local and 40 percent tourist business. An astronomical marketing budget of six to 10 percent of gross was spent in order to attempt to continue attracting customers. They just announced the closing of this store. It finally out-grossed the investment, it just took too long to do it."
The new Las Vegas Dive unit, Fetscher said, is likely to do better because it has "more of a central area, better lighting tones, and a dining balcony, so whether 50 or 200 people are seated, the scale is correct and you can see lots more people enjoying themselves. Plus, the Las Vegas unit is 90 percent tourist customers with a strong merchandise component."
In a nutshell, its the food that drives a successful theme restaurant.