Wisdom from the Restaurant Finance & Development Conference
Photos by Focus Event Photography and Joe Veen
How do you get a 16-year-old dishwasher to save a bit of mayonnaise from the recycle bin? For Paul Saginaw, co founder and “chief spiritual officer” at Zingerman’s Community of Businesses, it just took giving that dishwasher a slice of the company pie.
Saginaw, who helps oversee the collection of 10 foodservice businesses from candy to coffee and catering to baking and the Ann Arbor icon Zingerman’s Deli, said giving employees a sense of ownership was messy, but ultimately why the company has been so successful.
Three restaurant founders (pictured above) shared the stories of their entrepreneurial roots. Can you match the founder above with the story below?
1. At age 9, started ditching golf games on Hole 17 to collect stray golf balls and re-sell them for $1.
2. Worked for Oscar de la Renta, the high-end fashion designer, and the David Letterman Show and realized the importance of building a brand.
3. Sat around the dinner table, urged by parents to come up with solutions to any problems. Later developed a baby bottle with a timer and tried to get it patented.
(The answers to the quiz are: Mario Del Pero-1; Stacy Brown-3; and Matthew Corrin-2.)
Today, there are various forms of profit sharing across all industries, but for Saginaw and his founding partner Ari Weinzweig, inspiration came from a book called The Great Game of Business by businessman Jack Stack. The book outlined the idea of open-book management, which changed the business dramatically.
“I will tell you that there is no more powerful engine that has driven us toward more long-term profitability than going to open book where everybody is invited in to help run this business,” said Saginaw during a breakfast keynote address at the 2016 Restaurant Finance and Development Conference.
The change came with a lot of other transparency updates including a path to partnership in the company and an entrepreneurial club to foster new businesses. The short version of the management tactic, however, was to get employees involved by training them to read and watch a profit and loss statement, then to lead discussions around managing their line on the P&L. Everything above a certain point also went into a “gain-sharing pool” that was paid out to employees.
“We started open book in about 2002, and it was hard. People who had that information didn’t want to share it and people at the bottom had to learn it,” said Saginaw.
Hard was an understatement. Before the plan got traction, 70 percent of the management staff had left and the slog of the transition began to darken the altruistic goal. But that all changed one day.
“I was walking through the kitchen and the 16-year-old dishwasher who went to the high school next door went over to the recycle bin and pulled out the Hellmann’s can of mayonnaise and walked over to the prep cook and said, ‘You didn’t use your spatula to get all the mayonnaise out of that can. That’s my gain sharing check in there,’” said Saginaw. “I said, ‘Oh my God, I got a 16-year-old kid that has just connected all the dots.’ Sure enough, profitability just started ramping up. We were making more money and sharing more money with our employees.”
Birth of three entrepreneurs
Stacy Brown’s entrepreneurial roots go back to family conversations around the dinner table, said the founder of Chicken Salad Chick, an Auburn, Alabama-based franchise that now has 62 restaurants across the Southeast.
“My father was an entrepreneur, and dinner time at our house was a sacred time,” Brown recalled. “My mother cooked every single night, and my father would end the discussion about what challenges did you encounter today, and what are some solutions? That’s how I started coming up with products and innovations around the dinner table.”
Years later she had three babies in quick succession. “I lived in a cloud of not sleeping,” she said, and she invented a baby bottle with a timer attached to it, so she would remember when to feed her infants.
Later still she became a single mother, and needed to find a way to support her family. “It took me back to those dinner-time discussions, and soul-searching—what do I have to offer the world?” She went to work in her kitchen, creating chicken salad “like a science experiment. I made a recipe that made people’s eyes roll to the back of the head,” she said.
Matthew Corrin, CEO and founder of Freshii, the healthy fast-casual chain based in Chicago, did a three-year bachelor’s degree of arts and failed his first year of business class. Before founding Freshii, he worked for the Late Show with David Letterman and for Oscar de la Renta. He cited “two common threads: I ate at this same New York deli for years, and it was lackluster service and dull branding. Letterman touched the masses, and de la Renta, while he was very niche and expensive, so it wasn’t a mass brand, but everything he did was with style.”
Corrin started the first Freshii in Toronto a decade ago when he was 23. (It was called Lettuce Eatery then.) Freshii has just shy of 300 stores today. “We’re at the intersection of three driving forces: health and wellness; the millennial generation; and affordable entrepreneurship as we’re driven through a franchise model. Those three things come together, and we’re one of the fastest-growing restaurant companies.”
Mario Del Pero, co-founder of Mendocino Farms, said with a laugh he takes a different approach from Matthew Corrin in building Freshii. “Matthew’s is the fastest-growing restaurant concept in the country. We are probably the slowest-growing concept. We opened our first store almost 12 years ago,” and now they have 14.
Del Pero dreamed up his first money-making opportunity on the golf course. “I probably knew I was an entrepreneur at heart when I was eight years old, asking my dad to get out of the golf cart and leave me because I was going to dig out all the balls on the 17th green and sell them back to the country club,” he recalled.
Today Mendocino Farms emphasizes sandwiches made of locally sourced ingredients, and opened its first store in November within Whole Foods, which took a minority investment in the brand last year.
Saying goodbye to tipping, slowly
Wanting to treat restaurant employees like the professionals they are, Nick Kokonas eliminated tipping in his restaurants five years ago. He’s the co-owner with chef Grant Achatz of Alinea, Next, The Aviary and Roister in Chicago.
He said the move to a surcharge within his reservation ticketing system to cover the entire cost of the meal has “done a good of job of equalizing” pay for his front- and back-of-the-house employees.
“Chefs work incredibly hard and are talented, and there’s no reason they should be making one-half or one-third of what someone in the front of house is making,” said Kokonas, speaking alongside restaurateurs David Chang, David Cohn and Sabato Sagaria during a conference panel. “There’s those mercenary front-of-the-house folks who don’t like that, but they don’t belong in our company anyway. … We lost some people but gained others.”
Sagaria, chief restaurant officer of Danny Meyer’s Union Hospitality Group, agreed and said it was that “skyrocketing” disparity between the front of the house and back—along with wage increases and other challenges—that necessitated a shift away from tipping in favor of a “hospitality included” model that raised prices. Within that model is a road map to growth for employees, said Sagaria, and “it’s been very well received” since implementation began in late 2015.
“We have to look at how we can professionalize our industry,” said Sagaria as he noted the labor shortage in New York also played into the decision. “We’re not just competing against other restaurants for employees.”
For David Cohn, whose 23 locations within Cohn Restaurant Group in Southern California range from fine dining to fast casual, it’s increases in the minimum wage that are driving changes to his business model. “California is talking about $20 by 2020, so forget the 15 dollars,” said Cohn in reference to 15 Now campaigns across the country. In January, Cohn eliminated tipping and added a 3 percent surcharge to the bill at some of his restaurants, a move meant to cover increasing costs and begin offering benefits to employees.
— Laura Michaels
Food halls provide alternative venue
Market rents are high everywhere, but in trophy markets such as New York or San Francisco, it’s almost impossible to find a lease that makes sense.
Instead of fighting over the same box everyone else wants, many brands are looking seriously at shared spaces such as food halls. While the line between a food hall and the typical food court is certainly blurred as they both keep consumers in the trade area or close to home, food halls are increasingly being positioned as higher-end establishments, said Andrew Moger, founder of BCD, an outsourced real estate and construction management firm.
“It is essentially a marketing effort to build a better mousetrap,” said Moger.
Landlords see food halls as a unique amenity, allowing them to charge higher rents to neighboring retail and in residential developments. They also give restaurants a captive audience, much like a food court but with more regular traffic. They’re especially well suited for food-sparse areas where that traffic is amplified, even if the restaurant is two feet from the next counter.
“Even if you don’t get that guest four or five days a week, if you get them once a week, that’s a great customer,” said Moger.
Americans taking brands abroad
Three brand experts shared their experiences in bringing distinctly American brands to far-flung countries.
Daniel del Olmo, president-international at DineEquity (Applebee’s and IHOP), said one of his brand’s primary challenges was learning how cultural and real estate differences impacted the brand. Using the example of an Applebee’s in Qatar, one of its older international locations, the franchisee followed the brand’s pre-existing template that included a large bar in the center of the restaurant. Because drinking alcohol is much less common in that region, the brand had to tweak its model to de-emphasize or removed the bar altogether for its future locations.
Ned Lyerly, president-international of CKE Restaurants, used the example of the brand’s risqué advertisements, and said flexibility in real estate was a big part of the equation, as larger, freestanding locations are harder to come by in many other international markets. Included as part of his presentation, he showed several examples of international units, while going into the details of shrinking the back of the house and dining rooms to adapt the template to a much different environment.
Kevin Bazner, CEO of A&W Restaurants, offered similar anecdotes, including de-emphasizing its signature root beer with the letters RB to avoid confusion that it is an alcohol-based product. For a brand that’s had an international presence for 50 years, Bazner said many of its international customers have the same childhood memories that so many Americans do.
The overall theme was clear: international growth is a key part of many brands in today’s market, but getting there without making embarrassing or costly mistakes takes significant expertise. Managing the supply chain to ensure it’s profitable is a whole other story, and often requires the work of in-house or contracted experts.
Delivery is biggest disrupter in years
Experts from The Boston Consulting Group told a room full of restaurant operators that third-party delivery is going to be “the biggest-single disrupter in the restaurant industry that we’ve seen in the last several decades.” This is serious, they emphasized.
“It’s coming at us, and it’s coming at us very fast,” BCG’s senior adviser, Allan Hickok, said during a presentation about the future of delivery and third-party aggregators. “It’s a channel that, if you’re not prepared for it, it’s going to have a profound impact on your business.”
Hickok’s message, along with co-presenters Dylan Bolden and Mary Martin—both also from BCG—was there’s no debating whether third-party delivery will catch on, but rather how much this will inevitably shift the very foundation of the global restaurant industry. All restaurant operators need to prepare for the inevitable storm.
“Consumers want to reduce the friction in their lives…in all consumer industries, whether it’s retail, travel or tourism,” Hickock said, “they’re looking for ways to make their lives easier. It’s being driven by changes within technology—so these needs have always existed.”
Martin said BCG estimates delivery comprises about 5 percent of the U.S. restaurant industry, and it could be a $75 billion category as soon as 2020.