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Operator Perspectives 2016

After several years, slow growth has become the new normal. Consumers have more disposable income to spend eating out, but not a lot, and while confidence in the economy has grown, no one is wildly optimistic enough to open a wallet wide and spend freely.

Add to that a movement to increase minimum wages city by city, or state by state if the feds won’t; Obamacare covering more employees and individuals; commodities prices continuing to rise; and new construction costs as high as they’ve ever been; and the prospects for success in foodservice sound challenging, to say the least.

So we called on some of our industry’s top professionals to get their take on what’s key to flourishing in an environment like this. What we learned is surprising in some cases, and expected in others. Anticipate change, is what most of them advised.

Stay on top of consumer as well as economic trends and “prepare for what will happen next, not what’s happening now” is how they plan to succeed and beat their competition.

Specifically, our interviewees suggested, with the Fed just on the verge of raising rates, money is still cheap, but where you put it is more important than ever. Keep your eye on your core business, find new ways to serve and communicate with customers, and don’t forget standard “blocking and tackling”—i.e. excelling at good-business basics—if you want to thrive and grow.

YOUR PIE: Maintain Quality And Culture
With an expectation to more than double in size next year, the relatively young Your Pie chain, based in Athens, Ga., is on a wild ride. Founder Drew French got the idea for the concept on his honeymoon. Visiting his new wife’s family on the island of Ischia in Italy, French was inspired to cook pizzas in brick ovens from the pies he tasted there.

Despite the financial crisis of 2008, French opened the first Your Pie store in Athens, featuring hand-made pizzas baked in a brick oven along with panini sandwiches, chopped salads and gelato. “We didn’t know any different,” French says. “We didn’t know what a good economy looked like. Fortunately, Athens is very supportive of new businesses.” And since the chain opened at a time when banks weren’t lending, French thinks the company can continue to grow organically, without outside help.

While the company makes its own dough in a central location, most items, including the sauce for its pies, are made in-store. The chain purchases tomatoes from a key vendor in California, and specs for recipes are tight to ensure stores make and serve products that taste the same across the board.

“Our biggest challenge is to maintain the quality we established on day one, as well as the culture of our company as we grow,” French says.

With franchisees planning on opening about 35 stores next year in at least four new states, the company knows that good communication is key to accomplishing both goals. “We think of the business as the Your Pie family,” says French.

A four-week training course for employees helps reinforce core values and instill the culture of the Italian family that French and his wife are part of. The company also holds a three-day conference called “Franchise Fest” for franchisees, suppliers and their families, which French says is another great way to build the culture.

The company spent the last two years refining the brand’s operations, and tweaking products to improve taste and quality in anticipation of explosive growth, but it always looks for ways to improve. This past year, it changed some chopped salad ingredients and its dressing to improve flavor, and it improved its gluten-free menu items.

Five times a year, the chain promotes a “Craft Series” LTO. Units source in-season ingredients to create a unique flavor combination for a pizza and panini, which are paired with a craft beer. The seasonal-ingredient approach extends to the chain’s gelato offerings, as well. A recent special was a peach and prosciutto pizza topped with chopped basil and drizzled with a honey-balsamic glaze; the featured craft brewer was Sierra Nevada; and gelato bar served up peach sorbet.

The secret to Your Pie’s success is a four-part philosophy that guides everything the brand does. “We focus on food first,” French says. “Next, we make sure that the customer and team experience is one they both want to be part of. Third, just as we are a family, we become part of the larger communities we serve, by actively supporting them and their causes. Finally, we pride ourselves on innovation. Fast-casual pizza is really growing, and we have a huge opportunity to grow with it.”

READING HOSPITAL: Be Mindful Of Costs And Quality
Two years ago, Reading Hospital, Reading, Pa., completed a major overhaul of its then 53-year-old foodservice facility, including its kitchen, main cafeteria and a coffee shop/c-store. As part of the multi-year project, the hospital shifted to room-service-style patient feeding. “Just as we’ve settled into what I call our ‘new normal,’ we’re planning how to serve a new surgical tower expected to open in October,” says Marge Kipe, Director, Nutrition Services.

One way will be an additional retail coffee shop planned for the new building. Similar to the one opened in the new foodservice building a few years ago, the space will feature Starbucks coffee and c-store items, but will be operated by Kipe and her staff so that they can decide the best selection and mix of menu items.

The new tower will have 120 beds, but while it doesn’t add to the hospital’s overall bed count (because the hospital is moving to private single rooms), it does pose its own set of challenges. The biggest is that the new tower is a half-mile roundtrip from the foodservice building that houses the main kitchen.

“We’re looking at a bunch of possible solutions,” Kipe says. “My challenges are how to support new operations with our existing facilities and new technologies. And we have to come up with answers by February, since January and February are budget-planning months.”

One potential solution is putting a new, small kitchen in a space that’s being vacated as some offices and other functions move to the new tower. Another idea Kipe is considering is robotic food trucks that can deliver food across campus where room ambassadors can pick it up and deliver it to patients.

“The preliminary answer based on best ROI is robotics,” Kipe says, “because we save eight to nine FTEs. But we don’t know if the carts are fast enough, and given the length of the trip, how many we’ll end up needing.”

The bigger challenge, she says, is the effects of Obamacare that are just now beginning to be felt by the healthcare industry. Smaller reimbursements per procedure and penalties may strongly impact revenue, even if beds are full.

“We not only have to keep our costs in line with our peers in the industry, we have to keep them skinny enough to be paid for with these smaller reimbursements,” says Kipe. “But we can’t restrict spending so much that it affects Press-Ganey scores and patient satisfaction. We have to be ever mindful of costs, but ever mindful of quality, too.”

LENNY’S SUB SHOP: Redesign The Future
Three years ago, when new Owners Rick Johnson and Kevin Martin purchased the Lenny’s Sub Shop chain, Memphis, Tenn., they saw a huge opportunity to revitalize and grow the brand. Sales and customer counts had fallen in prior years, but the duo recognized the quality of the product and the value proposition of the brand.

After talking with franchisees, they identified three key areas for improvement: increasing traffic, improving unit economics, and creating operations systems that would be consistent across all stores. They brought in Jason Vaughn, a former senior director of operations at Taco Bell and division v.p. of Wendy’s Int’l., as President and COO.

“We had a lot of guest data,” Vaughn says, “and we looked at it as a way to let the market dictate to us rather than us dictating to the market. We looked closely at which menu items they want and what level of food quality they expect, as well as what kind of customer experience and how that’s delivered. First and foremost, we looked at what we could do culturally and operationally to support our franchisees and make the culture guest-centric.”

What the team learned was that LTOs and other types of promotions had led the brand away from its core “hero” products—the Philly cheesesteak sandwich and other basic sub sandwiches on which the chain had been founded.

Those core items have all been “re-introduced,” and refocusing on what brought the chain to the dance has allowed it to slowly expand the menu again. But the company has gone a big step beyond that by developing a new prototype store in Memphis that’s a preview of what’s to come.

“We did a lot of tests around how we make an order and how that order is delivered,” Vaughn says. “We looked at the operation from a labor- and food-cost standpoint in terms of what equipment we have and how the line is laid out. We analyzed everything within our four walls.”

The new design includes things like new ovens that do a more efficient job of proofing and baking the chain’s daily-made breads; bigger and more energy-efficient grills that are now situated out in front so customers can see, smell and hear food being cooked; and a new split POS terminal that lets two employees work off of one terminal. The company also focused on standardizing its processes.

“Our biggest challenges are the headwinds in commodities and labor costs, and our job is to make it easier on franchisees to be successful,” Vaughn says.

“If we know prices of a particular protein are going to go up, we won’t market or promote it. Are our process systems the most efficient they can be to allow franchisees to deliver profit with the rise in minimum wage? If we help them to master the basics like reducing waste and theft by watching inventory, checking deliveries and monitoring meat slicing, then sure we can.”

Several factors are setting Lenny’s up for success in the future: a new store design; a low cost of entry for franchisees relative to many other QSR concepts; a targeted approach to expansion that will take advantage of distribution, marketing and support efficiencies; and a renewed dedication to its core.

OHIO UNIVERSITY: Exceed Customer Expectations
Foodservice renovations at Ohio University, Athens, Ohio, have been on a tear. The university has overhauled three residential dining halls and its central food facility over the past eight years, and it isn’t finished yet. Still on the slate is a renovation of its Jefferson Marketplace, with construction expected to start in May for completion in January 2017.

“Our focus has been on renovating and improving existing facilities, not on opening up new ones,” says Rich Neumann, Director of Culinary Services, “in order to provide exceptional service to the community in support of its academic mission and vision. The best way we can grow our business is to retain our customers and encourage students who move off campus to continue to use our many retail operations for meal service.”

The renovation of the campus’s central food facility between 2010 and 2014, including complete updating of its cook-chill production, vegetable prep, bakery and warehouse, enabled Neumann and his staff to shrink the size of the kitchens planned in two residential dining renovations—Nelson Court and West Green Market District—by more than 50%. The size reduction saved $1 million in equipment costs and reduced labor costs as well.

Neumann hopes to make even more of the central kitchen’s efficiency by developing and forming partnerships with other state agencies to share resources and sell products and services to each other. “Currently, we are selling processed produce and individually packaged apple slices, carrot sticks, etc., to local schools in Ohio,” he says, “We hope to expand the program.”

But his department’s biggest challenge and opportunity continues to be retaining student customers as they move off campus. The Jefferson Marketplace renovation starting construction this spring should help. Located on the east end of campus, the facility is close to thousands of students who live in adjacent apartment complexes. Part of the plan to market the Marketplace to off-campus students is a partnership with the School of Communications: it will help produce and televise celebrity chefs’ cooking demos.

Overall, Ohio University’s strategy for foodservice improvement is working. In 2015, the number of off-campus students participating in a meal plan increased 13.4%, and the total number of students on a plan went up 4.1% over the prior year. That amounted to an additional $1 million in board revenue.

“Over a six-year period, the number of meal plans sold is up 16.2%,” Neumann says. “That’s outstanding growth given the slow economy we find ourselves in. Our goal is to keep showing the campus community that we’re the best option when it comes to providing quality food and service at an affordable price.”

BACK YARD BURGERS: Prepare To Grow Again
After closing nearly two-thirds of its corporate and franchise stores between 2008 and 2012, Back Yard Burgers, Memphis, Tenn., has clawed its way back to health, and now is poised to start growing again in terms of units and not just sales. New owners took over the brand and brought in David McDougall as CEO in early 2013.

“Going back to our roots was really the secret to our turnaround,” McDougall says. “We focused on our food and operational execution—serving hot, high-quality food in a timely, friendly way.”

To restore the trust of its franchisees and the vitality of its corporate stores, the brand had to get its costs in line and improve profitability. “Unit-level economics and ROI have to be in place, otherwise it makes no sense to open more stores,” McDougall says.

To do that, the company looked at all the ways it could reduce costs and improve the bottom line as well as revive and refresh the brand’s image. It shrank the menu substantially to focus on the core items that brought the chain success, especially its smoky, chargrilled burgers. “As part of the refresh, we’re looking at paring the core menu even more to eliminate slow movers and allow more LTOs,” McDougall says.

Shrinking the core menu has given the chain room to create some innovative burger specials, too, such as a Southern burger, a Farmhouse burger and December’s featured Mac-and-Cheese burger.

Anticipating future growth, the company has developed a new store design, and plans to build one or two corporate units and some franchise units based on the new prototype.

Much more light, airy and contemporary, the new design has a footprint about a third smaller than existing restaurants, and a kitchen that’s open to both the dining room and the drive-thru so customers can see the grill. “Our big challenges are the same headwinds facing the industry, especially labor and cost of goods,” McDougall says. “The cost of goods is stable for now, but still high.

Labor is a more daunting issue. More local municipalities, counties and states are passing new higher minimum wage laws, and this year we face a change in the number of hours worked before overtime kicks in, as well as new reporting rules. That will take money away from what we might have spent on expansion.

“And from a development standpoint, it’s getting increasingly difficult to find locations that deliver adequate ROI due not only to the cost of the land but the cost of development and construction, which has never been this high. It has to be the right space, in the right location in the right trade area.”

The company is on the right track, though, and customers have taken notice of the brand’s commitment to what it’s known for. Not only are former customers, especially baby boomers, coming back, but a whole new generation of customers is discovering the brand through word of mouth and the company’s social-media efforts.

To accommodate growth in student enrollment and update campus residential and dining halls, University of Missouri, Columbia, Mo., embarked on a renovation and new construction campaign in 2004 that still isn’t finished. That year, four new residential buildings plus a new dining hall opened, and another dozen new facilities—as well as several renovations—have been constructed since.

“We’ve spent about half a billion dollars,” says Julaine Kiehn, Director of Dining Services. “That’s billion with a ‘B.’”

A new residence hall is under construction now and slated to open in August. A second, with a dining hall attached, will open in August 2017, and the final residential building in this building boom is scheduled for 2018. Each of these residential buildings will house about 300 students.

In the meantime, a new Starbucks coffee shop is opening this month in the newly expanded engineering building. And next summer, the existing Market Southwest dining facility will begin getting a facelift, mostly with new finishes, but also some equipment changes and/or additions such as a replacement walk-in complex, and updated building controls, particularly HVAC to help improve performance of a variable-speed hood.

When the brand new dining facility opens in 2017, new equipment will include a second pulper, a more water- and energy-efficient dishmachine, and a new rotisserie, something Kiehn’s department hasn’t had before.

“Our challenges are really about getting plans in place for our 2017 openings,” Kiehn says. “The new dining facility is a departure from what we’ve done before and will require a lot of staff training. Instead of a marketplace-style cafeteria and all-you-care-to-eat meal plan, the new facility will have six separate restaurants, which we can open and close based on demand, all a la carte.” Like other universities, Mizzou is seeing more upperclassmen living off campus. To retain those students as customers, Kiehn’s department is making online meal plan deposits, online ordering and online payments accessible through mobile devices in May.

Another draw for all students is the university’s Culinary Development Kitchen, which now hosts five demonstration dinners per semester. Here students can see executive chefs prepare and talk about new menu items, and they dine on the finished meals family-style. Since the program started last August, buzz about the department’s great food has spread across campus.

TOPPERS PIZZA: Anticipate Where Consumers Are Going
“People aren’t going to stop ordering pizza,” says Scott Gittrich, President and Founder of Toppers Pizza, Whitewater, Wis., but he believes Toppers is growing because the chain recognizes the change in the market away from big chains to familiar food with attitude, elevated quality and great service instead of just fuel.

Gittrich has focused on aspects of the business, particularly the pizza business, that he found lacking, and built the business on quality standards such as using only Wisconsin cheese and making dough fresh each day; using toppings and pizza varieties that were considered “quirky” in the ’90s but that continue to draw traffic and differentiate the chain today; and getting food to customers faster, which means hotter and fresher.

The company constantly looks to the future to see where consumers are going in order to fulfill its mission. The chain’s first online order was delivered in 2008. Since then, the company has invested hundreds of thousands of dollars annually to connect electronically with its customers. Last year, 35% of sales came from online orders, and Gittrich sees that rising to 80% within the next decade.

“People are ordering on their phones when they walk in and see a line ahead of them,” he says. “A lot of our investment online is in software and content that connects customers to our POS system, and allows so many different types of devices to play together. In many cases, consumers placing orders online never set foot in a restaurant. Those orders appear in front of our back-of-the-house staff and are routed to delivery when they’re ready. Our website is in essence our restaurant for those customers.”

Late this year the company will roll out a new POS system that will make it even easier for customers to order and staff to track those orders. “We’re also testing several versions of a more open ‘lobby kitchen’ to open the experience even more to customers,” Gittrich says.

Even though the typical store’s footprint is small, around 1,200-1,600 sq. ft., the company continues to look at ways to make them more efficient and less costly to operate and maintain.

Two areas where the chain is considering making changes are refrigeration and ventilation. The company is exploring remote compressors and even the use of untampered air in northern locations for its walk-ins. It also is looking into demand-controlled kitchen ventilation systems that ramp exhaust up or down based on oven usage. In the meantime, this year stores will incorporate ceiling fans in open areas to lower HVAC loads, install timers for exterior lighting and signage, and increase insulation values in ceilings and exterior walls in new store build-outs.

“Technology is affecting our business as much as any industry out there,” Gittrich says. “We’re doing things like looking into drones for delivery because we have to maintain our leading edge.”

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