Family & Casual Dining
Family dining rivals its siblings
Given the rapid pace of change and innovation within the restaurant industry, it’s tempting to dismiss the family-dining segment as hopelessly over the hill. While touch screens are replacing servers and the once-rare chipotle pepper is now a menu staple, the stalwarts of family dining still conjure images of blue-haired ladies and a 4 p.m. dinner rush.
Considering that the first Friendly’s opened its doors in 1935, the Village Inn began serving pancakes back in 1958, and a Denny’s “Grand Slam” breakfast has been available for 30 years, the stodgy reputation is understandable. As restaurant analyst Michael Smith of Oppenheimer put it: “I think to a certain degree the whole category suffers from being considered a ’50s coffee shop.”
Relative to the rest of the industry, the family-dining segment has some challenges. According to NPD Foodworld Recount Data, the number of family-dining restaurants has decreased steadily over time, with 15 percent fewer units today than there were as recently as 1999. Technomic’s 2007 Top 500 Chain Restaurant Report has family-style restaurants turning in the slowest sales growth of any full-service segment last year, its 2.3 percent growth rate less than half that of the industry overall.
The challenges that face family dining concepts are many, including labor and commodity cost inflation that is of concern industrywide and an endless encroachment by other restaurant segments onto its turf. Piper Jaffray Senior Research Analyst Mark Churchill, who covers restaurants’ high-yield bond issues, including Denny’s, Friendly’s, Perkins and Marie Callender’s, traces some of the problem to the rapid growth of bar-and-grill players back in the early ’90s.
“Over a 15-year period casual dining has really killed family dining, or really just outperformed the segment,” he explains, referring especially to those chains whose dependence on lunch and dinner put them in direct competition with large—and at one time new—casual-dining concepts like Applebee’s and Chili’s.
Randy Brooks, president of Dynaco Food Concepts, franchisor of California-based family dining chain Perko’s Café, among others, offers a similar sentiment. “The family dining segment is the one segment that is getting attacked,” he declares, agreeing with Churchill that 20 years ago the competitive landscape was a lot less crowded. Of the family-dining segment today, he says simply: “It’s just done. It’s been done and done and done.”
To combat the staleness, continues Brooks, Dynaco is developing concepts “that have an element of design and cultural change that makes (customers) feel like they’re somewhere else.” Huckleberry’s, for instance, is a new concept that Brooks describes as “a theme restaurant with kind of a bayou-shack feel.” It serves only breakfast and lunch, and Brooks foresees converting some Perko’s that do the bulk of their sales by early afternoon to the Huckleberry brand, providing both a needed facelift and significant operating savings as a result.
Breakfast, of course, is the bread and butter of the largest family dining chains, and has long provided them a buffer—a “defendable niche” in Mark Churchill’s words—from the bar-and-grill chains. But here the family-dining segment is up against even more formidable competition in the form of a quick-service sector that views the morning daypart as a significant opportunity.
Chains the size of Burger King, Wendy’s and Starbucks want a bigger piece of the lucrative breakfast market. During IHOP’s first quarter conference call, CEO Julia Stewart cited “the potential impact of heightened competition at the breakfast daypart” for contributing to recent negative traffic at the chain, adding the company is “working to better understand this competitive dynamic and refine our strategies as necessary.”
A research report on the “Coffee and Breakfast Opportunity” put out by David Palmer of UBS Securities shows that while the number of breakfast meals purchased per person in the U.S. has grown steadily over the past two decades, all of the increase has come from takeout breakfast. In fact, he reports the per-capita takeout breakfast occasions “have grown by roughly 50 percent from 14 to 21 meals per year since 2000.”
At a recent Goldman Sachs investment conference, Denny’s CEO Nelson Marchioli offered this take on the weekday breakfast market: “I think the real opportunity for family dining as well as quick service for the breakfast daypart is to capture some of that business during the weekdays. Weekday is where the challenge is. I understand QSR breakfast weekday increased by about 7 percent last year; our business was flat for that particular daypart. So I do think there is an opportunity for us to capitalize on that, but to do that we’re going to have to be faster, more convenient, and we’re going to have to be more portable. We don’t have portable products on our menu today.”
Ken Stanecki, president of Denny’s franchisee Nath Companies, views breakfast takeout as a strategy “worth pursuing.” His restaurants, though, have not yet felt an appreciable impact from fast-food competition, neither at breakfast nor the late-night daypart that is crucial to Denny’s. “Sometimes when enough people are advertising the same types of things it gets more consumers buying during that daypart,” he points out. “So, although a lot of people are open a lot later, we haven’t felt the impact you would think. Sometimes it actually creates more demand.”
IHOP rolled out its “IHOP ‘n Go” campaign in February in an effort to boost takeout business at the company’s 1,300 mostly franchised units. The campaign involved improving the companies’ takeout packaging, adopting best practices in operations to assure order accuracy and speed, and spreading the word to their customers that takeout is an option, according to IHOP Corp. spokesman Patrick Lenow.
But IHOP sees an opportunity to compete with fast food within its restaurants, as well. “What surprises people when you look at our service times, it’s really not a significant difference” from QSR, says Lenow. He identifies “a continued opportunity for us to educate guests that quick service, particularly during the week, is an important priority for us.” If guests give it a try, they’ll realize “it really is possible for me to stop on the way to work and take 15 to 20 minutes and have a good meal.”
While both Denny’s and IHOP explore ways to innovate—such as adding drive-thrus to existing units or developing fast casual prototypes—they’re focusing on growth, too. Denny’s VP of Development Steve Dunn says the company is planning “to grow the overall unit count by a pretty substantial number over the next few years.”
Denny’s is pursuing its Franchise Growth Initiative that has it refranchising company stores in order to “seed” greater franchise development while it focuses company store openings on core markets. Franchisees that buy lower-volume company units will do so under incentive plans that provide franchise fee reductions and credits as they open subsequent units on a preset schedule. Denny’s contracted with the computerized mapping company MapInfo to “determine where we’ve got underserved demand in some key markets,” said Dunn.
IHOP, too, has plans for significant growth going forward and the company will continue to pursue growth almost exclusively through franchisees and license agreements. In 2007, the company expects to add up to 66 new units, including three international locations. Additionally, IHOP has over 450 development agreements in its pipeline either signed, optioned or pending, and management has suggested that the system could ultimately grow to 1,900 restaurants in the U.S. alone.
Given the competitive difficulties the sector faces, these growth plans are encouraging, though time will tell just how viable they’ll be. But growth is happening on the smaller end of the spectrum, too. Bob Manley and Bruce Dean, co-founders of the franchised Black Bear Diner in the Western U.S., just welcomed the 36th restaurant in their system.
With half its system in California, the company is especially concerned about the impact of minimum wage hikes and healthcare costs to the bottom line, but just as Randy Brooks said of his Huckleberry restaurants, Bob Manley describes Black Bear as an “experienced-based concept” that keeps people coming back.
“We feel extremely lucky that our same store sales are up and we’re chugging along,” says a confident, and grateful, Manley. He credits their success in part to the brands smaller and more independent feel. “We have a real loyal customer base and they’re almost cultish,” he explains, “and I think that tends to go with being a little bit smaller than just a generalized national brand.