Signaling a possible new era of restaurant growth — driven by a slight loosening of tight consumer spending and belief there is a pent-up demand for dining out — some operators are looking to open more restaurants than they close and jump overseas when U.S. plans mature.
The positivity comes after two consecutive years of negative unit openings for the industry, some massive chain closures and little expansion for even those brands deemed growth chains.
At a recent investor conference, the ICR XChange held in Miami last month, Krispy Kreme Doughnuts Inc. chief executive Jim Morgan said he would be personally disappointed if the chain didn’t reach around 500 units in the United States over the next five years. The chain currently tallies about 230 U.S. restaurants. Smashburger, the better-burger chain out of Denver, wants to move from 140 units today to around 300 units in 2013. It also plans to open in Canada, Kuwait and Central America this year. Boloco, a 17-unit burrito chain based in Boston, is looking to open six locations in 2012, a 35-percent growth rate on its small base.
At the root of more talk surrounding unit growth is improved sales trends, which most of the restaurant industry saw at the end of 2011.
“We have increased comfort … as recent sales trends across the industry appeared to be at least in line with expectations,” Bob Derrington, a securities analyst with Morgan Keegan, said in a research note to clients. “With the prospect for a modest improvement in consumer confidence, restaurant operators and investors seemed broadly optimistic that momentum gained in 2011 in sales and traffic is likely to continue into 2012.”
But growth won’t be across the board. The economy is still uncertain, consumers’ spending habits and plans change often, and financing is still tight. For those brands that are well capitalized and believe they have found a differentiated concept consumers want, however, growth is on the horizon — though new units may not come from traditional big-box builds from the ground up, but may center on smaller footprints, remodeled locations and unique real estate strategies.
And finally, growth trends will certainly not return to the industry’s heyday.
“The industry is entering a new phase of its lifecycle whereby ‘10 percent-ish is the new 20 percent,’ as it relates to unit growth,” according to senior research analyst Nicole Miller Regan of Piper Jaffray.
In a recent report to clients, Miller Regan’s research showed that in 1998, public company concepts growing units at a rate between 10 percent and 15 percent numbered 10, and then dropped to four by 2010. The number of concepts growing unit counts by 20 percent or more numbered 15 in 1998, a number that fell to zero by 2010.
The industry’s lack of growth stemmed from recessionary trends: stalled sales, crunched margins, construction costs and investor pressure to meet returns on invested capital that were set on fundamentals no longer relevant during the recession.
“In response to those trends, we believe companies have started and continue to find ways of driving economically justified growth,” Miller Regan said.
She cited more efficient prototypes, dual-branded locations, renegotiated leases or the remodeling of current assets.
“It’s fun to be talking growth again,” Krispy Kreme’s Morgan said. “We’ve spent most of the last few years restructuring and building a foundation.”
While Krispy Kreme’s history is a well-known tale of boom and bust, the chain’s experience of growth, hard stop and pending re-growth is familiar to many restaurant chains, to varying degrees. To grow the right way, president Ken May said, Krispy Kreme will focus both on driving revenue through additional beverage sales — the chain’s coffee sales only contribute 4 percent of total sales — as well as reducing the cost of operations.
“We’ll focus on reducing the cost of the box,” he said. “You’ll probably see us shrink it.”
Most analysts predict that when the restaurant industry does see growth, it will come slightly from a few succeeding mature chains, but mostly from newer concepts that sit in favorable segments like fast casual.
“The broader number of companies succeeding in terms of same-store sales and unit growth are coming in these newer categories,” said Andy Barish, the restaurant securities analyst at Jefferies & Company.
He noted fast casual, coffee and polished casual as key restaurant-industry drivers.
Even among the brands that are in growth mode, the competition for today’s consumer food dollar is stiff. While value pricing, menu innovation and ambiance always will play key roles in attracting customers, both restaurant operators and analysts alike cite the need to draw key demographics like Millennials — those aged 17-34 — and a more diverse consumer set.
Denny’s Corp., for example, spoke about the success of its CollegeHumor.com marketing campaign aimed directly at the Millennial generation, and also noted the hiring of a new Hispanic advertising agency.
“That effort to chase Millennials will pay off big,” said John Miller, chief executive at Spartanburg, S.C.-based Denny’s, which operates or franchises about 1,670 units.
Piper Jaffray’s Miller Regan said successful restaurant brands will shift from restaurant characteristics that spoke to baby boomers to those that speak to Generation X or Generation Y, which include differentiated dining experiences, diverse flavor profiles and technology-enabled interaction, whether through tablets or kiosk ordering.
“We believe certain subsegments — such as quick service and fast casual — are inherently closer to this Generation Y customer group, and thus, initially better positioned to meet their dining preferences,” Miller Regan said. “However, we recognize that any restaurant concept in any industry subsegment is capable of updating their image and consumer interaction to increase the brand’s appeal to Generation Y constituents.”
Contact Sarah E. Lockyer at sarah.lockyer@penton.com.
Follow her on Twitter: @slockyerNRN.