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FER EXCLUSIVE: Perspectives 2013

There’s little talk of the recession in the foodservice industry anymore. Instead, some of the industry’s top operators talk about uncertainty. Even with a contentious election behind us, there’s still uncertainty about how rules will be written for the Affordable Care Act, when and how much real estate prices might rise, how great the impact on food and gas prices last summer’s drought will be, and whether or not capital sources loosen their tight-fisted ways.

While all that may sound like the folks we talked to see a continuation of the bad old days, the opposite is true. They not only expect their sales to increase, they expect their organizations will grow. And they’ll maintain margins in the face of rising costs, they say, by squeezing efficiencies out of their store designs and equipment, by paying attention to the little things to keep costs in line and by scouting for the best locations as cheap real estate fades into memory.

Most of all, they told us, they plan to focus on their brands and what differentiates them from growing competition. Read on for more about the challenges they face and the opportunities they see ahead.

CSU: Contain Costs
Deon Lategan, Director of Residential Dining Services
Colorado State University, Ft. Collins, Colo.
Existing Units: 9
2013 Activity: 1 (will replace temporary unit)

“Over years of renovation and expansion, it’s become clear that when we develop a concept, we need to design in flexibility for the future.”

Getting smaller to get bigger may sound like a dichotomy, but at Colorado State University, Ft. Collins, Colo., it’s the name of the game. In the midst of an aggressive construction campaign to attract new students, the university has built an entirely new “academic village” with an urban feel where students gather to study and live. Buildings in the complex have classrooms on lower levels and housing on upper floors, and the project has added beds for an additional 600 students.

Despite growth in enrollment, director of residential dining services Deon Lategan has actually shrunk the number of dining areas from 12 when he first arrived on campus a decade ago to nine now. The consolidation has allowed Lategan to keep pace with his biggest challenge—rising costs.

“We can offer more choices more cheaply under one roof than we can in multiple locations,” Lategan says. “It’s more cost-effective for us to offer four soups at two locations than two soups at four locations.”

Fewer facilities have meant higher productivity, and the increased volume in each dining facility has reduced waste. The increase in enrollment also has boosted growth in faculty/staff and off-campus student meal plans, producing a new source of revenue. At the same time, however, students have become more demanding, putting more pressure on costs.

“We have to provide the best food and service possible to attract students,” Lategan says. “They’re choosing schools these days based on food.”

To meet those demands, new facilities in the past few years have included a wider variety of ethnic foods like a Mongolian grill station, a build-your-own pizza station, a noodle sauté station and a gelato station. Lategan has implemented a halal food program for the Muslim students on campus, and is looking into Kosher foods as well.

“The biggest change for me has been paying attention to details,” he says. “The rising cost of commodities, particularly corn, has us worried about food costs. We have to work harder at cost containment. We’re constantly asking ourselves if we should change specs to save a few pennies. That sense of uncertainty makes us nervous but it also makes us more attentive to getting things right the first time.”

Lategan and his staff retrofitted all their hoods with demand-ventilation controls, switched to pulpers to save on tipping fees, stopped using trays to save water and dishmachine chemicals, switched to CFL and LED lighting, and now specs Energy Star equipment. All the school’s new buildings are Gold LEED standard or higher.

Lategan also has kept labor costs steady despite the growth in meal plans, and has reduced food costs from 25% to 22% by purchasing more products through group buying organizations, and by maintaining a warehouse on campus and buying in bulk. Just in case, Lategan is tying all bids for the $1.5 million in revenue he does in summer conference programs to the Consumer Price Index.

Mama Fu’s: Leverage Your Space
Randy Murphy, President and CEO
Murphy Adams Restaurant Group, Austin, Texas
Existing Units: 14
2013 Activity: 9-10 units

“As a business owner, I know that business depends on consumer confidence. A lot of people are uneasy with regard to what’s coming down…”

Randy Murphy, president and CEO of Mama Fu’s, Austin, Tex., sees a bright future ahead for the fledgling chain. He ought to know. Four years ago Murphy, who was then a franchisee, bought Mama Fu’s Asian House from Raving Brands. Since then, the chain has opened a dozen stores and lined up franchisees for a couple dozen more.

Along the way, Murphy and the Mama Fu’s team have leveraged what works and fixed what doesn’t. Early in 2012, Mama Fu’s unveiled a new prototype store that cut the footprint to 2,500 sq. ft. from 3,000, saving an average of $50,000 in construction costs and $2,000 per month in operating costs.

The chain’s “flex casual” service concept offers fast-casual service at lunch and easy-going full service at dinner. The redesign reduced the number of seats and makes it easier to service take-out customers, who account for about 40% of sales.

Another innovation last year, The Black Market Menu, introduced new menu items not listed on the regular menu, such as egg drop soup, Vietnamese pho, Bangkok green curry, and báhn mì sandwiches. The special items are intended for regular customers who know to ask for them, and rotate approximately every three to six months. The program has been so popular, the chain now holds internal culinary competitions to come up with new ideas. Two new items are the result of the challenge.

“Our biggest opportunity is the space in which we operate within the industry,” Murphy says. “We’re one of very few companies franchising in the Asian niche, and this is a tight little brand.”

With natural gas prices so low in many areas, Murphy isn’t too worried about energy costs, though the chain did look into more energy-efficient woks. Unfortunately, the equipment they found hasn’t been approved for use in the U.S. yet. And though rising commodity prices will have an impact, especially corn, which impacts both food and fuel costs, Murphy says raising menu prices isn’t a good option. “If higher gas and food prices are the new normal, we’ll have to find our margins somewhere else.”

“The biggest challenges for us are consumer confidence and access to capital,” says Murphy. “The former will affect whether or not people want to invest, and the latter whether people can invest. A third area is what will happen in healthcare, which affects 50% to 60% of our workforce. Right now there’s a lot of uncertainty, which could translate to less spending.”

Pizza Hut: Reinvest In The Brand
Bruce Perkin, Chief Research and Development Officer
Pizza Hut, Inc., Plano, Texas
Existing Units: 12,000 (approx.), 6,200 domestic
2013 Activity: N/A

With a strong model of financial success, it becomes much easier to drive growth in our asset base, and frankly this also helps us improve consumer accessibility to the Pizza Hut brand…”

As part of Yum! Brands, Pizza Hut, Inc., shares its parent company’s overarching business strategy of building its global business through aggressive expansion—particularly in China—improving its consistency and return on investment domestically, and driving long-term value to franchisees, shareholders and customers.

But owing to its differences from its sibling brands, Pizza Hut has its own way of delivering on those strategies. In recent years, the company has focused on two key areas: driving customer value and wringing costs out of its stores to drive franchisee and shareholder value.

“We are constantly working to build and upgrade the products at the core of our menu so that we can make every consumer experience great,” says Bruce Perkin, chief R&D officer. “In addition, we will always do what we are famous for, which is providing great product innovation at a great value. We also have totally re-engineered our asset strategy in recent years, with the principal focus on how we can provide superior return on invested capital.”

The company firmly believes that technology can improve energy efficiency and increase the sustainability of its stores and products, Perkin says. In recent years, Pizza Hut has developed and installed more efficient exhaust-only oven hoods and is testing air curtains to improve hood capture and containment. An incentive program with its suppliers has helped it replace older ovens with new, more efficient models. Fryer manufacturers also have developed burner upgrade kits to convert existing fryers to Energy Star standards. High-efficiency fryers replace units that can’t be retrofitted.

Stores now use programmable thermostats, and most are starting to convert to more efficient T-8 lighting from T-12. Lighting controls also are getting an upgrade to include photo cells, time clocks, and contactors for energy savings, especially for exterior lights and signage. And the company is testing low-flow spray nozzles and hand sink aerators to reduce water consumption.

Value pricing—the introduction of the “any-pizza-for-$10” deal—has strengthened the brand’s position and customer counts. Now, the chain looks forward to filling the pipeline with new creations that give consumers more of what they want.

Driving value has helped the company reinvest in the business, growing its international presence. “Our biggest challenge in 2013, which is really an opportunity,” says Perkin, “will be to stay focused on the key issues that will drive the most significant outcomes.”

Smashburger: Fine-Tune Growth
Scott Crane, President
Smashburger Master LLC, Denver
Existing Units: 200
2013 Activity: 70

“Our biggest challenge as we grow is maintaining the caliber of our people and the consistency of our brand.”

These are exciting times for Smashburger. The fast-casual burger concept has grown from a single restaurant to an international chain of more than 200 stores in five years. Even as sales in the QSR and fast-casual segments cooled in the fourth quarter, Smashburger’s held strong, putting the company in a good position for continued growth in 2013.

We’re looking at increasing the number of corporate units we open next year,” says Scott Crane, president. “We opened 18 in 2012, and plan to open 30 this year.”

Most of the company’s phenomenal growth to date has come from strong franchisee partners. The chain has lined up agreements for about 450 franchised stores, so its focus this year on corporate units is more strategic.

“Our biggest challenge as we grow is maintaining the caliber of our people and the consistency of our brand,” Crane says. “We’re cognizant of the dangers of growing too fast.”

That recognition has prompted the chain to constantly fine-tune its operations and menu to match changing consumer tastes and maintain healthy margins as costs rise.

“Beef, obviously, is our number-one commodity, and we’ll likely have to take action to counter rising prices,” Crane says. “But one advantage of our rapid growth is that the number of stores we now have has helped us gain purchasing power.”

The chain also has looked hard at store design for efficiencies in both energy use and operations. Smashburger now specs an LED lighting package because both the upfront cost and ROI are more acceptable. The chain also specs high-efficiency fryers now to provide faster recovery time, more consistent temperature control and ultimately more consistent product quality.

An energy monitoring system (EMS) that’s been in test stores is rolling out this year because of the savings it generates. The system helps keep restaurants within four degrees of a desired temperature, eliminating the chain’s biggest customer complaint. It also alerts store managers to issues such as walk-in doors left open.

The exercise is even more important now that Smashburger has expanded internationally with stores in Canada, Kuwait and Saudi Arabia. “Our continuing challenge is to match store development costs in other countries and provide support,” Crane says.

Other challenges to growth include the uncertainty over how actual regulations will affect the labor market as pieces of the Affordable Care Act take effect in 2014, and increasing competition. But Crane is confident that Smashburger’s unique concept, menu breadth and attention to local market tastes put the chain in an excellent position to keep growing.

UCSF Medical Center: Do More With Less
Dan Henroid, Director of Nutrition and Food Services
University of California, San Francisco
2012 Units: 7 (includes patient feeding and 5 contract retail outlets)
2013 Activity: 0 (new hospital with 6 units opening in 2015)

“We’re really focused on the value we can offer customers because we have the flexibility to change our menu and our competitors can’t.”

If there’s one thing Dan Henroid has learned during his tenure as director of nutrition and food service at UCSF Medical Center, San Francisco, it’s how to do more with less. Henroid oversees patient feeding at the 600-bed main hospital and a 104-bed satellite hospital, a 366-seat café for patient families, staff and students at the university, and a $2.3-million catering operation. Also indirectly under his purview are five contract retail outlets at the two medical centers and a small c-store in the main campus.

“There are no undergraduate students at the university,” Henroid says, “so there’s no meal plan. The student union directly across the street from us has a food court, and while the contract foodservice facilities only have to pay living wage, I pay union wages plus benefits. I have to compete on price and convenience, and with features like our salad bar, which they don’t have.”

The main production kitchen and café underwent a major renovation last February. As a result, revenues were up more than 4% in 2012, but Henroid has been asked to reduce his labor cost in the next year by 5% in the face of rising costs, all while maintaining prices and margins.

“We know our purchase prices are likely to go a little crazy this quarter,” he says, “so we’re trying to consolidate our menu cycles and compress them into something resembling restaurant dining. We’re going to rotate concepts in and out about every three months, starting with a taqueria.”

The renovation included the ability to interchange equipment, such as substituting a sauté stove in place of a wok, giving the operation more menu flexibility.

“We’re also looking for more supply aggregation,” says Henroid. “Buying groups aren’t driving prices down fast enough.” He recently pooled forces with three competing hospitals to negotiate a better deal on a cage-free liquid egg product, and expects to deal with as many as a dozen other hospitals on other projects, even those with contract foodservice.

A new, 289-bed women’s, children’s and cancer hospital is under construction in the Mission Bay area. A Silver LEED project, the hospital will include on-demand patient feeding, a 180-seat café, c-store, three retail outlets and a food truck, all of which Henroid plans to operate internally.

As the medical center’s chief sustainability officer, Henroid has spec’d all Energy Star-rated equipment, of course, and has a goal of purchasing 20% of the medical center’s products from sustainable sources by 2020. He’s also always on the lookout for more efficient ways to operate. A temperature monitoring system, for example, tracks 145 refrigerators across all facilities, and Henroid spec’d a half-size unit on patient floors that has a slide-out motor, making repairs simple.

The production kitchen’s single exhaust duct runs from the second floor to the roof of the 15-story building. Henroid can’t change it or add more equipment underneath it, so he’s looking at hoodless cooking solutions such as sous vide on a large scale, with major safety fail-safes in light of hospital patient clientele. With 65% of his business coming from retail, though, sous vide is worth consideration.

All part of doing more with less.

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