Figures Don't Lie, But Liars Figure When They Pick And Choose Figures Describing The Status Of Restaurants--Or Is It Ignorance?

This column of Strolling the Agora is from the August 2, 2010 issue of SHOPPING CENTER DIGEST

It’s an old, tired cliché, and yet true to a great extent--because that is what clichés are. The cliché? That figures don’t lie, but liars figure. Now take some of the latest numbers that have been circulating the last few days regarding the restaurant industry, one of the fastest-growing segments in the shopping center-retail chain industry today, at a time when few will classify this real estate niche as an aggressively expanding market.

So, some point to the number of US restaurants that closed within the past year, mostly independents. The tally of 5,204, according to the NPD Group, signals that “It’s been a difficult time for the restaurant industry, with customer traffic down over the last year” by about 3%.

I won’t dispute the numbers, but I question the analysis and conclusion. As one, no doubt biased and knowledgeable maven (Paul Fetscher of Great American Brokerage Co ) who specializes in this market keeps telling me, business is good because “people always gotta eat.” If you compare the number of closings with the totality—316,641 independents and 267,868 chain units—that’s not horrendous; in fact, it’s a very low percentage.
So compare the negative assessment with another, conflicting survey from People Report which states that employment expectations from restaurant operators are up, nearly at the same level before the economy tanked. It reported that 42% of operators that were surveyed expected to add hourly workers in the third quarter, while only 5% would cut staff, and that nearly half expected to hire more managers. This survey predicts modest growth in the restaurant industry increasing through the rest of the year.

No dispute that it’s easy to gorge on all those numbers and regurgitate only those that grab the most attention. None of us are immune from that disease. A question, however: Do they do it for the attention, or is it through lack of knowledge, ignorance?

I see that some of the largest most successful chains are reporting increases in same store sales, operators like Ruby Tuesday, The Cheesecake Factory, Panera Bread, Cracker Barrel. And that numerous others are taking advantage of the stubborn recession and lower rent demands by landlords to expand aggressively on the homefront, many through franchising. Especially ethnic restaurants focusing on the growing appetite for Mexican, Indian, Chinese, Philippine food, or the old, reliable standbys like Chick-fil-A, Pizza Hut, Domino’s, Papa John’s…hey, are these “Italian” restaurants no longer ethnic???, Subway, Quiznos, Taco Bell, KFC, Popeye’s.

Overseas Expansion

The behemoths, of course, McDonald’s, Burger King, Wendy’s, Starbucks, haven’t been doing so great domestically, and some of them are directing most of their expansion to foreign shores; we’ve discussed a number of these points in earlier columns and why they see greater growth opportunity across borders.

With today’s technology, with billions of bits of conflicting data swirling all around us, anyone can pick and choose which ones to pay attention to, and which ones to ignore. No question, the bigger the number—without clarification or explanation—the more likely it will draw attention.

Another example: Chain Store Guide has identified the 50 fastest-growing restaurant chains with more than 20 locations over the last five years; leading the pack is Which Wich Inc, which has grown 836.4% over the last five years. Impressive, huh? It has a total of 103 locations and total annual corporate revenue of $9 million; I’m not a great mathematician, but that’s only $88,000 that each unit conributess to the corporate coffers.

Some of the better operators in the restaurant industry would probably be closing individual units that did $88,000 in total sales for the year. Ruby Tuesday, for instance, is converting several of its underperforming restaurants to other brands in its family—Jim ‘N Nicks Bar-B-Q, Truffles Café, and Wok Hay—at a cost of $400,000 each. I’m willing to bet that each of the conversions are producing--as underperforming locations--more than $88,000 in annual sales to the corporate accounts.

Hey, it’s still a more impressive figure than that of No. 7 on the list, Froots Fresh Smoothies, whose 54 units produce a total of $1,900,000 in corporate revenue, or just over $35,000 each.

Discounting A Danger

The most common practice by retailers to drive customers into the stores is by deep discounting. Many are betting on increased sales for Back To School because of heavy discounting--which may not always lead to a profitable balance sheet. But it does increase traffic and protect market share, according to experienced retailers.

And then, there’s Cracker Barrel, with its 594 restaurants and its philosophy. It made $14.4 million the last quarter, up 20% from a year earlier. The reason for its success, according to CEO Michael Woodhouse, is because it didn’t slash prices as many of its competitors did.

“Once you devalue something, you’re digging a big hole and it’s (tough) to get out of that,” he said. Instead of getting “caught up in price warfare” the chain focused on providing value and “treating our guests right.”

The chain is ranked at the top of the list of 10 national full-service restaurants in customer satisfaction, according to Technomic Inc, based on its consumer survey of 4,000 respondents.

Understand What You’re Seeing

So now we get back to dealmaking and leasing and developing our shopping centers. All of the above must be taken with shovels full of salt.

I’ve heard some landlords still insist that they wouldn’t drop the rent because they have a great project—and have seen them with vacant stores until “they dropped the rent”—or lost the project.

And I’ve heard some restaurant chains become nervous about making a deal in a center, because the location they’re considering was vacated by another food operator. It may, however, have been a poor operator, or the wrong brand in a good location. The demographics for a corner may look the same for a Pizza Hut, KFC or a Dunkin’ Donuts, but for one it’s a home run and for the another a disaster: Is the heavy traffic in stopping for coffee, or a bucket of chicken for breakfast?

Look at the numbers. But above all, understand what you’re looking at.

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