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January 2008
PERSPECTIVES 2008
By: Janice Cha

With prices for stainless steel, fuel and commodities hitting new highs, the real estate market going haywire and lawmakers turning out restaurant-targeted regulations like pancakes, 2008 will prove interesting to say the least.

But restaurant operators plan to forge ahead regardless. They're overhauling their restaurant designs to improve labor efficiency or take advantage of a wider variety of locations. They're opening new units and facilities—lots of them—to serve growing markets. And they're streamlining equipment suppliers for more efficient purchasing and expansion.

We know because we checked in with the heads of some leading chain restaurants and one healthcare institution to get their take on what the year will bring.

In the next few pages, you'll find their thoughts on what challenges lie ahead for these companies in particular and the foodservice industry overall.

Subway: Going Green
Ed Degnan, Equipment Specialist
Subway, Milford, Conn.
Existing Units: 28,600 in more than 85 countries
2008 Plans: 2,500 new units

A small Subway shop that opened two months ago in a Kissimmee, Fla., strip-mall could well influence the equipment choices of Subway stores to come—and quite a few existing stores to boot. That's what Equipment Specialist Ed Degnan and the team of Subway designers are hoping, at least.

The Eco-Store features a high-efficiency HVAC system, remote condensing units for refrigeration and ice-making equipment, day lighting and controls for high-efficiency lighting, LED interior and exterior signs, low-flow water fixtures and building and décor materials made from sustainable sources. The project follows U.S. Green Building Council guidelines.

The Kissimmee store's energy efficiency will be measured throughout the year against a nearby twin Subway store built without the environmentally friendly features.

"We'll use the Eco-Store as our learning laboratory and share the best-practices elements with franchisees," Degnan says.

The company recognizes that most of the green technology will be in new stores. "It's difficult to convince a franchisee to get rid of a piece of equipment that still works," Degnan says. "Our goal is for them to make choices that will save money in the long run."

"As a franchised operation, we can't say 'you must do this.' But we can certainly provide a lot of appealing options," he adds.

The greening of such a huge enterprise as Subway, with its 28,600 stores in 85 countries, is part of the corporate strategy.

In addition to equipment, Subway's other green elements cover distribution and packaging. Retooling the supply chain by situating distribution centers next to vendor manufacturing plants has eliminated nearly 10,500 truck routes—saving more than 1.6 million gals. of diesel fuel each year in the process.

On the packaging side, a recent switch to napkins made with 60% post-consumer materials has saved the equivalent of 147,000 trees per year. And opting for plastic drinking cups made of polypropylene has saved the equivalent of 13,000 barrels of oil, the company says.

"It's our hope that our franchisees will embrace the Eco concept and want to spread it throughout the country," Degnan says. "We're concerned about the environment. It's where we live."

Domino's Pizza: 20/20 Efficiency
Jim Murabito, Director
Domino's Pizza Equipment & Supply, Ann Arbor, Mich.
Existing Units: 8,510 in more than 55 countries
2008 Plans: 200+ new units

A highly efficient new prototype plus an international yen for pizza are helping Domino's Pizza overcome twin challenges: domestic competition and rising commodities prices.

"The nearly 70,000 pizza outlets in this country create enormous pressure to keep menu prices low," says Jim Murabito, director of Domino's Pizza Equipment & Supply. "I don't think you can find more competitive retail pricing. It makes store profitability very challenging."

Domino's has tackled this challenge in part with a labor- and space-efficient prototype that was rolled out in 20 locations last year. The proto, dubbed Vision 20/20, consolidates all the action into a more compact space. At its heart is the "command center"—a customer service station that positions the POS system only steps away from the make table, oven and cut table. An updated menu board, new signage, brighter colors, tile and lighting package complete the look.

"The Vision 20/20 design will handle a larger volume of business faster, with greater labor and space efficiency," Murabito says. "Now it's the standard for all new stores."

On the equipment front, Murabito's team continues to monitor fast-bake oven technology. "The possibility of saving even one or two minutes in out-the-door time is pretty exciting," he says.

The year holds plenty of obstacles for everyone in the pizza business, though. "Cheese prices are at their highest ever, and wheat has hit a 10-year peak due to more acreage being devoted to corn for ethanol production," Murabito says. "It's almost a perfect storm."

Luckily for Domino's, the rest of the world continues to crave pizza. Nearly two-thirds of the company's new stores in '07 were launched abroad—ditto for '08. And Domino's global sales rose 7.2% through the third quarter of '07, marking the 55th consecutive quarter of same-store sales growth.

Daphne's Greek Café: Careful Expansion
Steve Fricker, President
Daphne's Greek Café, San Diego
Existing Units: 78
2008 Plans: 15 new units

Steve Fricker's 2008 will be a busy one indeed. "Our goal is to 'Serve Greek to America' and we've got a lot of the country left to go,' says the president of Daphne's Greek Café. The Southern California chain's New Year resolutions include joining the franchise fray, expanding into two additional states and refining its recently debuted Express concept.

Until now, the casual-dining chain's 78 restaurants—located mainly in home-state California plus Arizona and Colorado—have been strictly company-owned. In November, however, Daphne's filed its Uniform Franchise Offering Circular. Fricker expects to sign the first franchise deal by early summer.

Hand in hand with franchising comes a move to standardize equipment maintenance. "We've brought in a facilities manager to oversee everything from HVAC to equipment. At the same time, we're revising our preventive maintenance procedures," Fricker says.

Last year the company took its first steps into quick-service territory with the August debut of Daphne's Greek Express on the campus of San Diego State University. "The long-term plan is for the Express concept to target college campuses, upscale mall food courts and possibly airports," Fricker says.

On a broader scale, legislative issues in the "People's Republic of California" will only make things more interesting for Daphne's and other restaurants. For starters is the $8 minimum wage that took effect on Jan. 1. "That won't impact us directly since we pay a higher starting wage, but it'll certainly affect our service providers, who will eventually be passing along higher costs," Fricker says. Other legislation that could impact California operators includes proposed menu labeling laws and a possible mandated healthcare plan.

Steadily rising gas prices pose another challenge. "California is a big commuter market, so gas money comes straight out of disposable income" says Fricker, who also serves as vice-chairman for the California Restaurant Association. "We're definitely feeling the pinch. My sense is that it's the same for other California operators."

El Pollo Loco: A Balancing Act
Steve Carley, President and CEO
El Pollo Loco, Costa Mesa, Calif.
Existing Units: 390
2008 Plans: 50 new units

Growth and expansion are always a balancing act, and no one knows that better than El Pollo Loco's Steve Carley.

The president of the quick-casual chicken concept oversaw the opening of some 30 "Crazy Chicken" locations last year, many of them across the country in such new markets as Atlanta, Chicago and New England. Carley's team will debut about 50 stores this year. Most of the units will follow the upscale 2007 proto design with its contemporary Mexican décor, display kitchen and natural light-filled dining area.

While planning for growth, El Pollo Loco officers are also keeping an eye on big-picture factors: the economy plus commodity and materials costs. "We're in for a tough year from an economic and consumer standpoint— economists are finally beginning to get more pessimistic," Carley says.

On the commodity front, "prices of corn, wheat, cheese and beans have been going up at a rate we haven't seen in decades," Carley says.

As for materials costs and availability, "we grow our business by building new units, so we're hoping construction cost increases will slow a little this year. They were up at least 25% last year," Carley notes. "The only possible silver lining we see from the housing market meltdown is that it could relieve some of the demand pressures for basic construction materials," he adds.

Efficient use of labor is one ongoing challenge that El Pollo Loco has addressed with smarter kitchen procedures. To streamline production of the chain's signature citrus-marinated chicken, for example, the company has outfitted kitchens with an automated marinator and a convection oven, accomplishing the work in half the time.

The company is also starting to look at green initiatives. "You can have whatever opinion you want on global warming, but we should be doing what's right for the environment out of common sense," Carley says. Recent tests have included waterless urinals, which would save some 40,000 gals. of water per fixture per year.

Johnny Rockets: Consolidating Suppliers
Lee Sanders, President
Johnny Rockets, Lake Forest, Calif.
Existing Units: 235 units
2008 Plans: 50 new units

Lee Sanders isn't aiming for much. All Johnny Rockets' new CEO wants is to more than triple the chain's current number of stores.

Jumping expansion into "rocket" speed has meant streamlining the building process. Sanders, whose rapid-rollout expertise comes from overseeing the building of about 500 Buffalo Wild Wings stores in his previous position, has scrutinized everything from the floorplan to equipment specs to contractors and architects.

For starters, there's the scalable floor plan that was rolled out last April, a design that can be sized to fit an 800-sq.-ft. space with a walk-up window, or expanded into a full-sized 2,500-sq.-ft. restaurant.

The variable floorplan helps Johnny Rockets sidestep a common woe of restaurant developers: the lack of affordable real estate in decent locations. "Our business model gives us a lot of flexibility where real estate size, format and price are concerned,"Sanders says. "We're a plug-and-play operation."

Sanders has also begun to consolidate the company's equipment purchasing. "Where we'd been buying, say, four brands of a given piece of equipment now, we'll reduce that to one or two brands in the future," Sanders says.

Supplier reliability will be a key factor in the decision. "A growth chain has to get the equipment they need, when they need it," Sanders says. "Can the supplier meet our needs? That's what we'll be looking for."

Ditto for architects and contractors: "We'll be converting to a certified architect and contractor program where we train providers to help franchisees open more rapidly,"he adds.

As for the big-picture, if the economy continues to slide southward, it's restaurants that will take the hit. "You can't not buy gas if you have to travel to your job," Sanders says. "But you can eat out less frequently, and you can spend less when you do eat out."

Shands at UF: Bracing For The Future
Bill Notte, Director of Food and Nutrition Services
Shands at the University of Florida, Gainesville, Fla.
Number of Beds: 650
2008 Plans: Laying groundwork to add 192 beds and a cook-to-order kitchen in '09

Interesting times, as the old Chinese curse goes, lie ahead for many operators in the healthcare foodservice segment. Three challenges will impact hospitals: uninsured patients, aging boomers and an aging infrastructure.

"There are at least 47 million uninsured people—and many more under-insured—who are straining hospitals "budgets,"says Bill Notte, president of the American Society for Healthcare Food Service Administrators and director of food and nutrition services at Shands at the University of Florida. On top of that, about 78 million baby boomers are beginning to turn 60, many of whom will need extra medical attention in the coming decades.

That, combined with aging facilities, adds up to a major budget challenge—and potentially less money for foodservice as it competes for capital dollars. Shands' 20+ year-old kitchen, for example, got its first major overhaul only last year: a long-overdue renovation to the kitchen and tray assembly area.

One healthcare dining trend Notte has incorporated at Shands is adding chain restaurants to the mix. Shands' own food court includes Wendy's, Hovan (a Mediterranean wrap concept) and a Subway shop. Shands currently serves some 3,900 meals per day in the cafeterias, 3,500 in the food court plus an additional 1,000 meals to patients—numbers that will only rise.

"Chain brands are familiar to guests and therefore friendlier than traditional hospital cafeterias. Also, employees like having additional choices," Notte says. "We're going to be seeing more space for food courts and less space for cafeterias. We're also going to see customers expecting more round-the-clock foodservice."

Notte pauses, then offers up an ongoing challenge in the healthcare foodservice field: Finding and retaining employees who can commit to the often grueling work. "[The hospital kitchen has to function] despite hurricanes, storms, fires and floods," Notte says. "In my 37-year career, we ve never missed serving a meal. Let's hope we can continue to find people with that kind of dedication."

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