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January 2009
SPECIAL REPORT

Weathering The Perfect Storm

Just when we thought rising costs for food, fuel and construction materials were the real problem, the economy melted down. Fortunately, the pros in our industry know how to handle a crisis. Read on for six operators' coping strategies heading into 2009.

By Mike Sherer

As 2009 dawns, the memories of rising costs for food, fuel, construction materials, equipment and labor are fresh. But fresher still are the memories of last fall's financial crisis. Just when our industry—heck, our whole country—thought things couldn't get much worse, they did.

Many operators, however, had used spiraling costs and a tough consumer spending environment as the impetus to embark on belt-tightening programs long before the recession hit. Today, chains in strong cash positions find themselves still able and willing to open new stores. Chains that rely heavily on franchising for expansion are having a tougher time, but they're still growing, too.

While the media reflected mostly gloom and doom last fall as the markets tanked and the bailouts began, several operators FER spoke with were guardedly optimistic about this year. Though growth may be slow and painful, operators say they will survive. Here's how.

P.F Chang's: Measure Against Benchmarks
Kent Kelso, Director of Purchasing
P.F. Chang's China Bistro, Scottsdale, Ariz.
Existing Units: 189 P.F. Chang's; 165 Pei Wei Asian Diner
2009 Activity: 8 to 10 P.F. Chang's; 6 to 10 Pei Wei

"We...pride ourselves on premium cooking equipment and techniques, and we value continued innovation."

P.F. Chang's China Bistro isn't as concerned about the economy as it is about doing things right, says Kent Kelso, director of purchasing. "We're still in a strong financial position," he says, "so the changes of the past few months haven't much affected how we'll do business. We've only slightly changed expansion plans."

Kelso's big project this year, though, isn't the anticipated building of up to 10 P.F. Chang's units and eight Pei Wei Asian Diners. His focus now is setting benchmarks.

"One thing we're really good at is beating the heck out of equipment," Kelso says. "By 2010, we'll have to look at renovating a lot of kitchens. The chain is 13 years old, and most of our kitchens last only about seven years before they need significant upgrades. We haven't done a good job of tracking equipment performance, so I'm going to go out and benchmark how it's supposed to perform."

P.F. Chang's is a culinary-driven company, and as such it doesn't compromise when it comes to equipment. "We're an organization that prides itself on premium cooking equipment and techniques," Kelso says, "and we value continued innovation."

For example, last year, the chain completed the biggest innovation in its history with the addition of a grill that allowed it to expand menu offerings and save space. The company also has become more aware of its global footprint. "We're really getting into making sure we're making the right decisions," Kelso explains. "On the Pei Wei side we focused on a high-efficiency fryer, and [recently] we've been getting our thoughts around efficiency—not just in equipment, but in making sustainability a goal."

Initial progress on that front includes new dishwasher-safe takeout packaging that can be reused instead of simply tossed out by consumers, and a new energy- and water-efficient dish machine.

The benchmarking project will give Kelso an opportunity to see how noncompeting chains operate. "We want to evaluate their processes as well as their equipment," he says, "taking a soup-to-nuts look at how other people do it, from putting together service contracts to setting up systems to tracking everything to do with equipment."

Benchmarks, he says, will enable the chain to continue to innovate and build its business.

Fatburger: Maintain Discipline For The Long Haul
Bentley Hetrick, V.P. Construction
Fatburger Corp., Santa Monica, Calif.
Existing Units: 93
2009 Activity: 10 new units

"Don't forget what you've learned. If you maintain discipline, you'll be in a good position to move forward."

Fatburger opened its first stand in 1952, so the company knows the hamburger business. Only recently, however, the chain has gotten serious about expansion, opening new stores from California to Dubai. And now the financial meltdown has put the brakes on a lot of new stores.

"We had a lot of domestic deals in the pipeline, but now people can't get money," says Bentley Hetrick, v.p. construction. "So we're focusing more on international [development]. There's a lot of interest out there in places like Kuwait, Dubai, Hong Kong and Macau. Canadian franchisees also are doing well and slated for four to six projects next year."

On the upside, the slowdown has given the chain an opportunity to exercise discipline and evaluate how well it's sticking to the business it knows.

"We're thinking every decision through," Hetrick says. "In good times, people change their business model, and when times get bad they suffer. We look at this as downtime when we can shift focus from construction to things like preventive maintenance and ways to stay flexible while still maintaining discipline."

There are good deals in real estate now, for example, and though the company is looking at fewer sites these days, it is even more selective. "Don't forget what you've learned," Hetrick says. "Just because a site looks good, if it's 200 sq. ft. too big, it may end up being a problem."

The chain also is developing and implementing energy management classes for chain managers to teach energy-saving techniques such as installing demand ventilation and turning out lights.

"Since we're based in Southern California, we attend classes at Southern California Edison and the PG&E Food Service Technology Center. We're very dialed in, and we take advantage of seminars, energy-saving devices and rebate programs we hear about through water companies, utilities or the FSTC."

In addition to spreading that knowledge to operations in other parts of the country, Hetrick is also using this downtime to carefully analyze new construction, operations, equipment purchases and ongoing maintenance.

"As we expand nationwide, we have to look at utility rates to see where it makes sense to use gas or electricity," he says. "When we look at new equipment, we consider maintenance, energy savings, lifecycle costs. If you maintain discipline, lenders will see that, so when money loosens up, you'll be in a good position to move forward."

Scottsdale Healthcare: Make Do With Less
Betty Ann Stephenson, Director, Hospitality Services
Scottsdale Healthcare, Scottsdale, Ariz.
Existing Units: 2 hospitals
2009 Activity: No new foodservice operations

"I don't care if one steamer is better than another when a combi oven will do more than either."

You wouldn't think words like "downturn" and "recession" would have much effect on the healthcare market. After all, people get sick no matter what the health of the financial markets. The segment, it turns out, is subject to the same vagaries as the rest of the economy, which means operations like Scottsdale Healthcare have to make do with less.

"Our revenues are off 20%," says Betty Ann Stephenson, director of hospitality services. "As we lived through the decline last year, we reduced overall planned capital expenditures $10 million. We cut another $25 million in planned spending as a result of the financial crisis."

Stephenson, who runs foodservice operations in 450- and 340-bed hospitals in Scottsdale, was in the middle of a three-year renovation of the main kitchens in both facilities. The projects were allowed to proceed, but on a five-year schedule, not three. And the hospital now is looking for a net present value on back-of-house improvements in four years. When the project was initially presented, hospital administrators were delighted Stephenson's department projected an eight-year ROI.

Her budget for replacement equipment also was cut by $75,000 last fall, and if she does have to tap her emergency pool for new equipment, she has to show a nine-month ROI instead of the usual 18-month goal.

"I had a steamer down and a steam kettle down," she says. "We decided to repair the steamer one more time and not repair or replace the steam kettle at all. We have combi ovens in both facilities, so we'll make do with those."

Stephenson has placed increased emphasis on preventive maintenance and now does a monthly assessment of all equipment to evaluate what may need repair or replacement. When she goes out for new equipment, she looks for efficiency wherever she can find it.

"I try to find savings in operating efficiency, lower maintenance costs and lower energy costs to run the equipment," she says. "I want equipment to be able to do more than one thing, and I'm looking for innovation. Can one piece of equipment replace two I have now? Can it save labor costs in the kitchen? Is it more energy efficient? I don't care if one steamer is better than another when a combi oven will do more than either."

These days, Stephenson says it easier to purchase a new dish machine than a less expensive flat-top grill. She can justify the savings in energy and water by replacing an old dish machine with a newer model. But it's a lot harder in tough times to justify a flat-top grill, she says, just because it would be nice to make changes to the menu.

Au Bon Pain: Value Engineer A Tighter Ship
Kevin Golden, Director, Construction Services
Au Bon Pain Corp, Boston
Existing Units: 175 (130 company owned; 45 franchised)
2009 Activity: 5 new units

"For us, capital cost is most important, so it's absolutely essential to reduce the cost of opening cafés."

"At the start of our fiscal year, Sept. 1, we didn't talk about the stock market or the credit crisis," says Kevin Golden, director, construction services for Au Bon Pain. "Now, we're not only talking about how it all affects our plans, we're talking about how to stop the bleeding."

By mid-October, the chain had deferred all planned remodels for the year (between 15 and 18) and renegotiated with landlords where upgrades were required by the lease; deferred all discretionary capital expenditures, including equipment even if it fails (they'll fix it instead); reduced the number of stores it will open this year; and taken a small menu price increase.

"It's amazing how quickly the market and the economy dropped," Golden says. "It literally happened in less than four weeks. Now we're preparing for a long-term recession."

The company had already started battening down the hatches before the collapse of the financial markets, looking at ways to run a tighter ship.

"We began a comprehensive value-engineering study pre-collapse," Golden says. "We're looking at making significant changes in our cafés to effect a 15% reduction in our equipment and supplies packages. We're taking a look at the minimum amount of equipment needed to open cafés. We've also changed equipment models, and in some cases manufacturers."

The chain has also brought in an energy consultant to review where it can be more efficient in terms of both the building envelope and equipment, from light fixtures and HVAC system to hood fan package and equipment.

"We're looking closely at what manufacturers can do to value engineer our equipment, to reduce price points and make it more energy efficient," Golden says. "For us, capital cost is most important, so it's absolutely essential to reduce the cost of opening cafés. We hope we'll also get a faster payback from reduced energy use, but efficiency is not as important."

The company is evaluating ways to tweak how it operates, too. "This situation forces you to run operations more efficiently, so when we do come out of the recession, we'll be a stronger company," says Golden. "At the same time, we don't want to take anything away from the operation or the customer experience." A tall order, but one the company says it's up to. Editor's note: We conducted this interview with Golden in early November, and at press time we learned that he had accepted a position with Trademark Equipment in Ashland, Mass.

Disney Parks & Resorts: Capitalize On Expenses
Martin Cowley, Senior Manager, Restaurant Design & Construction
Walt Disney Co., Anaheim, Calif.
Existing Units: Not available
2009 Activity: Not available

"I'm asking manufacturers to give me capital solutions to operating expense problems."

Martin Cowley, the restaurant go-to guy at Disney Parks & Resorts in Anaheim, Calif., is used to making things happen. He, like all the other cast members in the Magic Kingdom, makes magic every day. Whether it's opening new foodservice operations for a Disney park in China or fixing a broken sprinkler inside a walk-in in Anaheim, Calif., Cowley and his team ensure that guests have the best possible experience.

Now, Cowley is asking equipment makers to make a little magic of their own. Cowley has three priorities this year, all of which revolve to some degree around equipment.

"Domestically, our big concern is expenses," he says. "We have two sources of funding, one for capital and one for operating expenses. We're really looking at controlling the expenses of daily operations that affect the bottom line. I have a fair amount of capital available, so I'm asking manufacturers to give me capital solutions to operating-expense problems. Give me something I can spend capital funds on that will help me save on expenses."

Small equipment and smallwares, in particular, are areas where Cowley hopes he can generate savings. For example, the company's bakeries switched from metal muffin pans to silicon molds. They don't get scratched or dented, can be thrown into a dish machine, and last far longer than metal pans, he says.

The challenge is that his threshold for investments is $5,000. Anything that costs more comes out of his capital funding; anything less comes out of operating expenses. When Cowley purchases china for a new operation, for example, he can pay for it out of his capital fund, but replacement china hits his operating expense budget.

Manufacturers who think outside the box might be able to work the kind of magic Cowley's talking about. "Take refrigerator gaskets. We have [an outsource] service guy who spends all day walking around the property replacing worn-out gaskets. If someone came up with a gasketless refrigerator, I could justify replacing every refrigerator we've go." Gaskets, obviously, are an operating expense. New refrigerators, however & well, you get the point.

Cowley's other two priorities are cast member safety and food safety. In both arenas, he's looking for solutions through better designed equipment, not just additional training. For example, he's in the process of refining the sixth prototype of a new piece of equipment that will substantially reduce workers' comp claims in a particular area of the kitchen.

"Restaurants throughout the entire industry are using deals to draw people in," he concludes. "The only way to counteract the lower check averages is to reduce costs."

Abuelo's: Going Back To The Future
Dickie Overstreet, V.P. Properties
Abuelo's Mexican Restaurants, Lubbock, Texas
Existing Units: 41
2009 Activity: 2 to 4 new units

"We just went back to our original designs and found they could feed more people."

At less than 20 years old, it's not surprising that the Abuelo's Mexican Restaurants chain has gone through growth spurts. During the most recent, in 2005-'06, the company put up 15 stores in 18 months, nearly doubling the size of the chain.

"It really affected us in terms of depleting our manpower," says Dickie Overstreet, v.p. properties. "We decided to slow down because we needed to train more management at the end of 2007. We figured if we slowed down, we could also work on being more predictable and consistent."

The company hasn't stopped building new stores while it catches its breath and trains new talent, opening two units in the last quarter. But this year, Abuelo's is focusing on making new stores efficient by reverting to its roots.

"We want to make sure the scale of what we build is efficient in terms of square footage," Overstreet says. "In the past, we built very efficient kitchens, but then we built bigger boxes and our kitchens got spread out.

"Now, we're looking at several things," says Overstreet. "We've scaled back the size of the building, and we're finding more efficient equipment to work in a smaller space. In essence, we went back to our original designs and found they could feed more people. With more efficient equipment placement and looking for ways equipment can do more than one thing, we've been able to drop some exhaust hoods and eliminate duplicate equipment that was only being used for prep work in the morning."

To save on construction costs, Abuelo's is reversing direction and soliciting bids from local contractors and sourcing materials locally wherever possible.

"Labor and material costs are going up," Overstreet says, "but the biggest thing to hit us in the past year was transportation costs. Everything in the building is trucked in from somewhere else, so we're tweaking designs to accommodate local materials unless the design element is a sacred cow and integral to the concept.

"We also tried using the same contractors from state to state to get some pricing leverage," he adds, "but for the store we recently opened in Florida, we used a local guy because he came in with the best numbers. As long as the customer experience is the same from store to store, we're always looking for different ways and materials to save money."

That philosophy also includes equipment, an area where the company's focus is on energy savings. High on Overstreet's list for future stores are new energy-efficient walk-ins, high-efficiency fryers and energy management systems. The chain now measures energy use to see how much money new HVAC systems and equipment are saving.

"You'll see us at the NAFEM Show," he says. "That's where we find some of the best contacts to help us buy the equipment and materials we need."

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