High Gear: R&I’s 2007 Ranking of the Top 75 Multiconcept Operators

Beyond developing new restaurants, multiconcept operators bring acquisitions, partnerships, even franchising into play to accelerate growth.

By Derek Gale, Special to R&I; -- Restaurants & Institutions, 10/15/2007

Chicago’s Lettuce Entertain You Enterprises developed the traditional model for building a multiconcept restaurant company. The strategy was to leverage the success of a first restaurant by opening a second, different concept in the same market, and then a third, and so on.

That approach still can work, but it is a fairly slow-growth strategy. Slow growth lost its appeal long ago, however—even Lettuce Entertain You has expanded to Las Vegas, Minneapolis and other markets—and multiconcept operators (MCOs) increasingly are pursuing strategies more akin to chain than independent restaurants. Successful concepts now are replicated in other markets. MCOs also are stepping down from their traditional upmarket niche to open fast-casual brands.

Baltimore-based Phillips Seafood Restaurants’ move into franchising is a striking example of an MCO chain employing a common chain-restaurant growth tool. And like Top 400 Chain companies, Top 75 MCO companies increasingly are expanding their networks through acquisitions.

These faster-growth strategies—as well as relatively strong sales for the high end of the restaurant business—help explain why this year’s Top 75 MCOs had aggregate sales of $6.06 billion in 2006, 9% ahead of sales in 2005.

No MCOs are talking about slowing down. "For any organization that has a strong infrastructure, management team and concepts, the opportunity to grow a given company is very viable," says Steve Stoddard, president and CEO of Seattle-based Restaurants Unlimited, which was acquired in March 2007 by equity company Sun Capital Partners. In July, Restaurants Unlimited found an MCO acquisition target of its own: Portland, Ore.-based Pacific Coast Restaurants (ranked separately this year at No. 17 on the Top 75 MCOs list).

Feeding the Beast

Stoddard does not feel that MCOs absolutely must make acquisitions a strategy to keep pace with the category’s growth, but he says his company "will continue to take advantage of acquisition opportunities as they present themselves."

Patina Restaurant Group CEO Nick Valenti agrees. An acquisition is "not necessary, but it does make things more efficient," he says. New York City-based Patina this summer acquired The Smith & Wollensky Restaurant Group, also based in New York City.

Patina, too, remains open to future deals. "We continue to look for interesting opportunities that we feel have a fit or some sort of relationship to what we do," Valenti says. "Partnering with experienced, successful brands is smart, particularly when the brand has an established customer base. The key is to choose partners that fit in well with the culture of your company and that are ready for growth."

Emeryville, Calif.-based Tavistock Restaurants jumped into the fast-casual category in July 2007 with its acquisition of 40-unit Freebirds World Burrito and is considering more fast-casual additions. "If we can identify a couple more appropriate concepts or brands that would work well together from a real-estate and human-asset perspective, we could roll those things together and get better leverage in the marketplace," says Tavistock President Bryan Lockwood.

Leveraging infrastructure has replaced creating new brands as MCOs’ driving force. "There is strength in numbers and size," Valenti notes, "with larger companies commanding better buying power, better leases and better deals. Larger companies can leverage staff resources across more operations and improve economic efficiency."

A Symbiotic Relationship

For midscale MCOs, which may not have the finances to swing acquisitions, entering into partnerships with hotel or casino operators is a popular growth strategy.

"Entering a new market is harder than doing something in your [home] market in the sense of marketing," says Lee Maen, partner in Los Angeles-based Innovative Dining Group (IDG). That’s one reason IDG is opening its latest Sushi Roku restaurant in the new W Hotel Scottsdale.

"Being associated with a brand like W is going to give you immediate people at your door. Being a stand-alone single tenant in a location in Scottsdale or anywhere has a lot more risk," Maen says.

"For a chef or restaurant company, from a financial standpoint, frequently the bulk of the cost of the physical plant is borne by the hotel, so you have a brand growth vehicle on the back of the hotel," says Niki Leondakis, COO of San Francisco-based Kimpton Hotel & Restaurant Group. "A lot of chefs are really getting the benefit of a hotel approaching them, where in many cases they wouldn’t have had the financing or infrastructure to build more restaurants at that point in their careers."

Maen says that hotel-casino opportunities can be a good real-estate play. "Locations are difficult to come by, and sometimes it’s just a great option," he says.

That has proved true for New York City-based Glazier Group, which has Strip House restaurants in hotels in Naples, Fla., Puerto Rico and Las Vegas, the last inside the new Planet Hollywood Resort & Casino. Additionally, CEO Peter Glazier says the company soon will open new Strip House locations in hotels in Puerto Rico and Key West, Fla.

"They’re high-end restaurants and we [are the] lead restaurant in a hotel. So we get a very high-end type of client who’s at leisure," Glazier says.

Hotel deals can include extra revenue-stream possibilities such as the handling of hotel catering and room-service operations. The arrangement can benefit hotels as well, allowing lodging companies to focus on their core business while using the cachet of a chef or a restaurant brand to attract guests.

"Today, particularly with boutique or lifestyle hotels, great restaurants and boutique hotels go hand-in-hand, with those kinds of hotels becoming more and more social centers in the community," Leondakis says.

Market Saturation

MCOs haven’t totally abandoned Lettuce Entertain You’s original strategy of "owning" a market by creating multiple restaurant concepts for it. Clustering operations in markets or regions offers operational efficiencies.

"There are certain synergies that are available," Valenti says. "A key one is the cost and knowledge in marketing. Once you learn about a market and know how to reach customers, that is helpful, and you can be more efficient with a second or third outlet."

Valenti also mentions the advantages of synergies related to purchasing and notes that sometimes multiconcept restaurant clusters are a result of establishing relationships with developers.

"You do a deal in a market; it works out; and developers have more going on, so they ask you to come along in other venues," he says. "To the extent that [the partnership] is successful, restaurateurs and developers are likely to continue that."

Restaurants Unlimited’s Stoddard says a regional-cluster strategy will be a key part of the company’s growth after it completes its purchase of Pacific Coast Restaurants.

"Their concepts are a tremendous complement to our concepts, which allows us going forward to be able to build out ... in a more complete manner," he says. "For example, we have three very successful restaurants in the Twin Cities—two Kincaid’s and one Palomino—so the ability to build another, say Palomino, is realistic, but with this complement of concepts [primarily Stanford’s Restaurant & Bar and Newport Seafood Grill], there is the ability to build a half-dozen of those in that market. Then we have 10 restaurants, which makes the synergies of managing that much stronger."

Following Consumers to Fast Casual

Creating a new concept to fill a gap in the market is another way to spur growth. Such is the thinking behind Luckyfish, a mid-price sushi concept that IDG, which also operates the higher-end Sushi Roku concept, plans to open this winter in Beverly Hills.

"As the new generations are growing up, and sushi is becoming more popular, we see [consumer] desire to eat sushi multiple times a week," says IDG’s Maen. "The average person out there can’t afford $50 per person three times a week, but there’s no quality out there at an inexpensive price point. We see a new niche at the $25 price point for a polished casual sushi bar. It’s for the masses."

The take-what-you-want concept—with sushi dishes moving past diners on a conveyor belt—will be fun and attractive for quick lunches and for families with children, Maen says. "Because of the belt, you can be in and out in a half-hour if you want to be," he explains.

With that element, Maen expects the concept to do more turns than IDG’s other restaurants and notes that Luckyfish will incorporate a much larger to-go component, as well as a strong emphasis on delivery. "We’re going to try to push delivery like pizza or Chinese food," he says.

Not everyone is looking at developing mid-price restaurants. Tavistock Restaurants’ new Zed 451 concept literally builds on the Brazilian steakhouse model: The company has converted to Zed 451 the two suburban-Chicago Sal & Carvão churrascarias it previously acquired.

The fixed-price menu and wandering servers continue, but staff members now wear chef whites rather than gauchos, and the selection of foods is seasonally driven and multicultural.

Tavistock plans a downtown Chicago location by the end of 2007 and locations in Boston; Miami; Orlando and Washington, D.C., next year. The restaurants will be large and expensive to build out, but Lockwood sees that as part of playing in the upscale space.

"Celebrity-chef-driven restaurants [using investor capital] spend a ton of money on design and style and give the diner a very special experience," he says. "You have to compete with that—there’s not an alternative."

The demands are many. "You have to deliver a very high-end, aesthetically pleasing, almost whimsical design and décor," he adds. "The given is an unbelievable culinary experience."

Phillips’ Plan

The idea for Phillips Seafood Restaurants’ move into franchising developed in a van during a duck hunt in England. Conversation between John Knorr, a senior vice president for Baltimore-based Phillips, and fellow hunter Stan Novak, a vice president for Bethesda, Md.-based contract manager HMSHost, evolved into a discussion of how their companies could work together.

That meeting was the beginning of an important new brand-development strategy for Phillips, previously known for operating large seafood restaurants such the 1,250-seat flagship Phillips Seafood Buffet in Washington, D.C. (which had sales in 2006 of $9.2 million). The Phillips Famous Seafood restaurants that HMSHost has opened in airports in Atlanta; Baltimore; Charlotte, N.C.; Norfolk, Va.; and Savannah, Ga. (and soon to open in Islip, N.Y.) are smaller, obviously, and midscale in pricing and style. Phillips sees franchising as the best way to expand them.

HMSHost next approached Phillips about a highway location in the Maryland House Welcome Center on I-95 near Baltimore. "We wanted to test a concept there, but it had to be quick-service," Knorr says. "We developed Phillips Seafood Express with a 17-foot linear counter there, and we’ve been happy with the volume since the day it opened."

Phillips is talking with HMSHost and other potential franchise partners about opening additional Phillips Seafood locations at domestic and international sites.

The company has been looking at many new ways to expand, Knorr says. One avenue is hotel restaurants. Phillips this year opened a restaurant in the Sheraton Philadelphia, operated by Columbia Sussex Corp., and additional locations in partnership with Columbia Sussex or other hotel operators are possible.

In Atlantic City, N.J., the company has opened not only a traditional Phillips Seafood restaurant but also a new sushi-menu concept, Souzai. "It’s a funky, fun project we decided to test because we had a great piece of real estate [available to us]; sushi is hot; and we wanted to try something new," Knorr says.

Such varied activity suggests how amenable Phillips has become to leveraging its brand, Knorr says. "We have a lot of equity in the Phillips brand, and we’ll certainly stay true to that," he says. "But if something new comes along or if we identify a hot segment, we might want to pursue it."

Derek Gale is a Chicago-based freelance writer.